spring 2016 archive (ba)
Week 14: April 11-15 On Tuesday we will begin with the demand requirement and cover the rest of the derivative litigation material. I will also bring the course evaluation forms. In thinking about derivative litigation and demand excusal, as in other circumstances we have been looking at (conflicting interest transactions) the issue of director independence is important. How do we think about director independence? We see from the material in the cas book that being named as a defendant isn’t enough to make a director not independent for the purposes of demand excusal. And it is an assessment based on facts. In October 2015 in In Delaware County Employees Retirement Fund v. Sanchez (Chief Justice Strine), the Delaware Supreme Court looked at a director who had a long term business relationship and a close personal relationship over a period of 50 years with the largest shareholder and director who was alleged to have benefited from the transaction challenged in the derivative suit. The Court wrote:
Determining whether a plaintiff has pled facts supporting an inference that a director cannot act independently of an interested director for purposes of demand excusal under Aronson can be difficult. And this case illustrates that. But in that determination, it is important that the trial court consider all the particularized facts pled by the plaintiffs about the relationships between the director and the interested party in their totality and not in isolation from each other, and draw all reasonable inferences from the totality of those facts in favor of the plaintiffs. In this case, the plaintiffs pled not only that the director had a close friendship of over half a century with the interested party, but that consistent with that deep friendship, the director‟s primary employment (and that of his brother) was as an executive of a company over which the interested party had substantial influence. These, and other facts of a similar nature, when taken together, support an inference that the director could not act independently of the interested party. Because of that, the plaintiffs pled facts supporting an inference that a majority of the board who approved the interested transaction they challenged could not consider a demand impartially.
On Thursday we will spend some time on securities regulation. Please read pages 845-854 of the Casebook, The Supreme Court’s 2015 Omnicare decision (Omnicare v Laborers District Council Construction Industry Pension Fund) and the DC Circuit’s 2015 decision in In re: Harman International Securities Litigation. These are two recent decisions that fit quite well at this point in our course. The documents look long but I don’t think they are as condensed as some of the material you have been reading in the Casebook. The Omnicare decision raises issues associated with securities issuance and the Harman International addresses liability under s 10(b) of the Securities Exchange Act and Rule 10b-5.
The following week we have a class on Tuesday and I plan to use that as a review session.
Of the past exams provided on the past exams page the Spring 2015 is the one that is based on the materials you have studied. Please note that I plan to give you a three hour exam this semester – which is what I usually do in this class. I have informed the registrar that it will be a three hour exam – even though last year’s was a four hour exam.
Differences between the class you had this semester and classes in previous semesters are partly due to issues in the news at the time (e.g. I have mentioned Foreign Corrupt Practices enforcement a few times, the VW emissions issues, other semesters there were other things going on) and partly due to the differences in the materials. This Casebook has more material relating to capital and smaller businesses, and the material on by-laws etc whereas the book I used before had more detailed material on derivative litigation and I used to have time to cover more securities regulation material. I try to write an exam that fits the course I have taught in the semester leading up to the exam.
If you would like to discuss the material with me as you review I am available either in person or by email.
Here is the quote I mentioned in class from an article by Jan Deutsch on Weinberger v UOP I was struck by this statement:
The clearer and more uniform a rule is, the more easily it is regarded as a formality that can justifiably be manipulated so long as compliance with its explicit formulation is maintained
We have read a number of decisions this semester where the legal rules were expressed in a way that was not very clear. Does the statement explain why that is? At the same time we have seen a lot of references to the idea that the courts shouldn’t interfere in business decision-making too much. Do the cases we have read strike the right balance between the two sets of concerns (avoiding only formal compliance and not interfering too much with business decision-making)?
Also, in Kahn v M&F Worldwide (Delaware Supreme Court 2014)(you are not required to read the decision) the court held that a merger conditioned by a controlling stockholder on two procedural protections:
(1) negotiations carried out by an independent and fully empowered committee that fulfills its duty of care and acts in a way that replicates an arm’s length transaction and
2) uncoerced informed majority of the minority shareholder approval
will be reviewed according to the business judgment standard.
Week 13: April 4-8 On Tuesday we will begin with compensation cases ( I would like to cover these relatively quickly if possible) and corporate opportunities and please read to page 652. For Thursday please read to page 677 and, omitting Chapter 13 please also read pages 773-792.
The Yahoo case I mentioned in class after Walt Disney is Amalgamated Bank v Yahoo (here’s a useful article). Vice Chancellor Laster said in his decision:
I need not and do not hold that the record developed to date establishes wrongdoing, nor even that it supports a claim for wrongdoing. It does, in my view, provide a “credible basis from which the Court of Chancery can infer there is possible mismanagement that would warrant further investigation.” To state what should be obvious, the existence of a credible basis to suspect possible wrongdoing sufficient to warrant further investigation does not mean that wrongdoing actually occurred. Even in Disney, where the complaint survived a motion to dismiss, the defendants ultimately prevailed….
There is a credible basis to suspect that Mayer failed to provide material information to the Committee during the early stages of the hiring process, when she cryptically withheld de Castro’s name, position, and qualifications while seeking the Committee’s blessing for a large compensation package that the Committee’s compensation consultant regarded as “generally more than the data supported.”… More seriously, there is a credible basis to suspect that Mayer provided inaccurate information to the Committee about the terms of the Original Offer Letter when asking them to approve a change to de Castro’s package, and that the Committee agreed to the change based on the inaccurate information that Mayer provided. The changes effectively doubled the payout on the Incentive RSUs and Options.
It may be that Mayer’s conduct did not constitute a breach of fiduciary duty, but it is worthy of investigation. Based on the current record, it is not clear why Mayer did these things, and a range of explanations are possible. She may have made an innocent mistake, and if this case ever proceeds on the merits, it might be shown to be inconsequential. She may have been negligent to some degree. Although it seems unlikely, perhaps she had some improper motive….
The credible basis becomes stronger, in my view, because of the changes that Mayer made to the Final Offer Letter. The Committee approved the Original Offer Letter, signed off on the elimination of the Specified Percentage for the Incentive RSUs and Options, and reserved its authority to approve any material changes in de Castro’s employment agreement. In preparing the Final Offer Letter, Mayer made additional changes to the terms of de Castro’s employment that materially increased his potential compensation. Mayer does not appear to have informed the Committee about the changes, and they do not appear to have been authorized by the Committee. Again, based on the current record, it is not clear why Mayer did these things, and the explanation may well be innocent or innocuous. Regardless, further investigation is warranted.
I said I would give you a link to the FTC announcement about Volkswagen: FTC Charges Volkswagen Deceived Consumers with Its “Clean Diesel” Campaign. The complaint states:
To induce American consumers to purchase its Defeat Device Vehicles, Volkswagen USA spent tens of millions of dollars on widely-disseminated advertising to convey “diesel’s environmental and economic advantages.”.. Volkswagen USA targeted much of its “Clean Diesel” advertising at “progressive” and “environmentally-conscious” consumers. Volkswagen USA’s marketers studied their targets’ psychology, concluding that such consumers “rationalize themselves out of their aspirations and justify buying lesser cars under the guise of being responsible.” According to Volkswagen USA, such consumers understood purchasing an eco-conscious vehicle as part of being “responsible.”
I also mentioned an article from the Intercept this week which states:
Bank of America, Lowe’s, Microsoft, and American Airlines all have two things in common: They have strongly criticized North Carolina’s new law that prevents local governments from prohibiting discrimination based on sexual orientation and gender identity, and money from their affiliated political action committees helped put the politicians who passed the law in office.
And here’s an article about how Johnson & Johnson Has a Baby Powder Problem
Week 12: March 28-April 1 On Tuesday we will begin with the issues raised in the book after Schlensky v Wrigley and Dodge v Ford which relate to corporate social responsibility and then move on to the cases at the end of Chapter 10. Please also read prepare to page 586 for Tuesday and read to page 620 for Thursday.
After Chapter 11 I plan to cover Chapter 12 and Chapter 14 and then spend some time on some securities regulation material (although we wont have time for much).
Week 11: March 21-25 Please read to page 546 for Tuesday and to page 586 for Thursday.
Week 10: March 14-18 Please read Chapters 8 and 9 for Tuesday and to page 546 for Thursday.
Week 9: March 7-11 Spring Break: Have a great break. In case you want to focus on BA, here’s the hypothetical question I put up here last week.
For week 10 I would like you to read Chapters 8 and 9 for Tuesday and to page 546 for Thursday.
Week 8: February 29-March 4: On Tuesday we will begin at page 373 and then consider the questions on page 325. Please also read to page 407 for Tuesday and to page 444 for Thursday.
With respect to oppression: In Baur v Baur Farms Inc in 2013 the Supreme Court of Iowa said this:
The determination of whether the conduct of controlling directors and majority shareholders is oppressive … and supports a minority shareholder’s action for dissolution of a corporation must focus on whether the reasonable expectations of the minority shareholder have been frustrated under the circumstances…. We hold that majority shareholders act oppressively when, having the corporate financial resources to do so, they fail to satisfy the reasonable expectations of a minority shareholder by paying no return on shareholder equity while declining the minority shareholder’s repeated offers to sell shares for fair value.
… Jack has not worked for and has drawn no salary from BFI for approximately fifty years. He—like the other BFI directors—received $5000 per year for his service as an officer and member of the corporate board prior to 1997. But in 1997, Jack was removed as an officer and the annual compensation for his service and that of the other directors was reduced to $250. Over the nearly twenty years as Jack negotiated unsuccessfully for the sale of his shares, the appraised value of BFI’s assets increased between fivefold and sevenfold to approximately $6 million. BFI, however, has never paid a dividend and, given the nature of its business and the variability of its cash flow, might never do so.
Jack confronts obvious practical problems as a minority shareholder seeking a remedy under the bylaw buyout provision. Despite his persistent efforts over more than two decades, he has not been able to sell his stock at a mutually agreed upon price. The book value option is similarly problematic from Jack’s perspective. BFI calculated and the shareholders ratified a 1983 year-end price per share of $686 at its 1984 meeting. That valuation approved in 1984 has never been formally revisited or revised. The language of the book value buyout provision fails to address several important questions: (1) whether book value must be set by express resolution of the BFI board or may be determined from an inspection of the books of the corporation without formal action by the directors or shareholders; (2) whether annual determination of the book value for purposes of the bylaw provision was intended; and (3) whether the board, when setting the book value under the provision, must use asset values that are reasonably related to “actual” or “fair market” values and be based on generally accepted accounting principles….As a minority shareholder and nonofficer, Jack will remain effectively precluded from capturing any return on his shareholder equity for as long as the board concludes income distributions are inappropriate… As a minority shareholder, Jack also lacks voting power to force the board of directors to set a book value that is reasonably related to the fair value of the company’s assets…we believe the record is not adequate to determine whether the price offered by BFI for the purchase of Jack’s shares is so inadequate under the circumstances as to rise—when combined with the absence of a return on investment—to the level of actionable oppression.
Last year at this time I provided a hypothetical question addressing some of the material we have covered. I am providing it again in case you find it useful. On the final exam rather than a “discuss” prompt, the facts will be followed by 4 or 5 questions raised by the facts. For now I am giving you a much more open ended question to think about.
Last year I covered Chapters 8-12 and 14, omitting Chapter 13 and we finished up with some securities regulation material. We seem to be on the same sort of schedule so this is the plan I propose to follow this semester also.
March 1: In class today I mentioned two developments relating to director removal. The first is the decision of Vice Chancellor Laster in In re VAALCO Energy, Inc. Stockholder Litigation, Consol. C.A. No. 11775-VCL that the only Delaware corporations that are allowed to have only for cause removal of directors are those with classified boards or cumulative voting for directors. Thus a corporation that declassified its board could no longer enforce a for-cause director removal provision. A number of Delaware corporations have reacted to the decision by announcing they will not enforce for-cause by-laws. Here is the announcement by Regulus Therapeutics Inc.:
Article V, Section C of our amended and restated certificate of incorporation (the “Charter”) and Section 20 of our Amended and Restated Bylaws (the “Bylaws”) contain similar “only for-cause” director removal provisions, and we do not have a classified board of directors or cumulative voting. As such, and in light of the recent VAALCO decision, we will not attempt to enforce the foregoing “only for-cause” director removal provisions. We will also seek to amend the Charter at our 2016 annual meeting of stockholders and will cause the Bylaws to be amended on or about the date of such annual meeting in order to provide that, consistent with Section 141(k) of the Delaware General Corporation Law, any of our directors or our entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors
I also mentioned that a class action is being initiated to challenge a by-law of Nutrisystem Inc. providing for a 2/3 supermajority to remove directors on the basis that section 102 of the DGCL states that such provisions may be in the certificate of incorporation. The litigation is a class action rather than a derivative action because it involves enforcing shareholder voting rights which are rights that are personal tot he shareholders and not rights of the corporation.
Have a good weekend.
Week 7: February 22-26 For Tuesday please read to page 341, and for Thursday please read to page 373.
As we read cases involving corporation I think there’s a tendency to think of shareholders as people who have a standard sort of relationship with a corporation involving financial rights and some governance rights. There is scope for adjustment of the rights, and different classes of shares come with different rights. But this idea of the shareholder has been challenged. Henry Hu has written (originally in a series of articles with Bernard Black and subsequently independently) that financial innovation has created a situation in which the economic interest associated with shares and the voting rights may be decoupled: the person/entity which has the right to vote may have a much smaller – or even no – economic interest in the corporation. This is really beyond the scope of our class but if you are interested you could read Henry T. C. Hu, Financial Innovation and Governance Mechanisms: The Evolution of Decoupling and Transparency (March 20, 2015). Business Lawyer, Vol. 70, No. 2, 2015. Available at SSRN: http://ssrn.com/abstract=2588052.
Week 6: February 15-19 Next Tuesday we will begin to focus on the material in chapter 4 (and please read the appendix at pages 997-1015 before reading chapter 4). In class we will focus on the cases. Please read to page 289 for Tuesday’s class.
The book refers to legal opinions written in the context of a securities issuance. Here is an example of a legal opinion relating to an IPO (initial public offering) of Common Stock of $0.01 par value of County Bancorp, Inc. containing the “duly authorized and will be validly issued, fully paid and nonassessable” language referred to on page 274 of the Casebook. The stock was approved for listing by NASDAQ. The IPO occurred January 15, 2015 and the IPO price was $15.75 per share. Here is a Description of Capital Stock of County Bancorp Inc. taken from the prospectus.
The prospectus describes the Issuer as follows:
County Bancorp, Inc., a Wisconsin corporation and registered bank holding company founded in May 1996, and our wholly-owned subsidiary Investors Community Bank, a Wisconsin-chartered bank, are headquartered in Manitowoc, Wisconsin. The state of Wisconsin is often referred to as “America’s Dairyland,” and one of the niches we have developed is providing financial services to agricultural businesses statewide, with a primary focus on dairy-related lending. We also serve business and retail customers throughout Wisconsin, with a focus on Northeastern and Central Wisconsin. Our customers are served from our full-service locations in Manitowoc and Stevens Point, and our loan production offices in Darlington, Eau Claire and Fond du Lac.
Shareholders of Fox River Bancorp are now being invited to vote to approve a proposed merger between County Bancorp and Fox River Bancorp (in fact it is an acquisition of Fox River by County). Here is what is being proposed to the Fox River shareholders (this comes from the Proxy Statement for the shareholders’ meeting):
At the meeting, you will be asked to approve a merger agreement between Fox River Valley and County Bancorp, Inc., which we refer to as County, that provides for County’s acquisition of Fox River Valley through the merger of Fox River Valley with and into County Acquisition LLC, a wholly-owned subsidiary of County. County is expected to dissolve County Acquisition LLC shortly after the merger and The Business Bank, currently a wholly-owned subsidiary of Fox River Valley, will then be a wholly-owned subsidiary of County. At the completion of the merger, each share of Fox River Valley common stock that you own will be converted into a right to receive a portion of the merger consideration.
You may elect to convert each share of common stock of Fox River Valley, $1.00 par value per share, which we refer to as Fox River Valley common stock, that you own into cash, shares of common stock of County, $0.01 par value per share, which we refer to as County common stock, or a combination of cash and shares of County common stock. All elections for cash consideration, stock consideration or the combination of cash and stock consideration are subject to proration and adjustment as described in this proxy statement/prospectus.
Subject to possible downward adjustment as described in this proxy statement/prospectus and assuming that the reference price of County common stock as described below is between $15.83 and $21.41 at closing, the aggregate merger consideration paid by County to Fox River Valley shareholders is expected to be $28,900,000, which County expects to pay approximately 50% in cash and 50% in shares of County common stock. The merger consideration is subject to downward adjustment, dollar for dollar, if Fox River Valley’s adjusted shareholders’ equity is less than $23,000,000. Assuming no proration of or adjustment to the merger consideration and that County does not waive the maximum number of shares of County common stock that may be issued, we estimate that County may issue up to 912,824 shares of County common stock to Fox River Valley shareholders as contemplated by the merger agreement.
On Thursday Peter Lederer will join us for the second hour of class. For the first hour please read to page 301. For the second hour please read this wikipedia entry on the Swiss Verein.
Week 5: February 8-12 I raised the question today (Thursday) of what difference it would make to the outcome of some of the LLC cases if we were to think about them from the perspective of the duty of good faith and fair dealing rather than from the perspective of fiduciary duty. The breach of fiduciary duty allows the court to invalidate the transaction carried out in breach of duty. But the remedy for a breach of the duty of good faith would be a contract remedy (generally damages). Next Tuesday we will begin with Barbieri v Swing-N-Slide and then focus on dissociation and dissolution in the LLC (read to page 216).
Then, also for Tuesday, compare the limits on contracting established in RUPA §103 (Fl. Statutes §620.8103) with Fl. Statutes §605.0105 Operating agreement; scope, function, and limitations. Compare Delaware Statutes § 18-1101. Also please read Florida Statutes §605.04091 Standards of conduct for members and managers, Florida Statutes §605.04092 Conflict of interest transactions, and Florida Statutes §605.04093 Limitation of liability of managers and members. Delaware Statutes § 18-1104 provides:
In any case not provided for in this chapter, the rules of law and equity, including the rules of law and equity relating to fiduciary duties and the law merchant, shall govern.
For Thursday please read to page 251.
February 10, 2016: Here is an example of a provision in an LLC Agreement that deals specifically with different aspects of the duty of loyalty:
… the Manager may compete with the business of the Company, is not required to refrain from dealing with the Company in the conduct or winding up of the Company’s business as or on behalf of a party having an interest adverse to the Company, and is not obligated to account to the Company and hold as trustee any property, profit, or benefit derived by the Manager in the conduct or winding up of the Company’s business or derived from the use by the Manager of property of the Company, including (without limitation) an appropriation of an opportunity of the Company
Week 4: February 1-5 On Tuesday we will begin by thinking about the issues partners should address in a partnership agreement and we will look at the limits on contracting established in RUPA §103 (Fl. Statutes §620.8103). For Tuesday please also read to page 178 and for Thursday to page 216 (as usual this is probably over-ambitious).
With respect to LLCs here are some statutory links:
Florida Revised Limited Liability Company Act
Fl. Statutes §605.0105 Operating agreement; scope, function, and limitations
Fl. Statutes §605.0106 Operating agreement; effect on limited liability company and person becoming member; preformation agreement; other matters involving operating agreement
Florida Statutes §605.04091 Standards of conduct for members and managers
Florida Statutes §605.04092 Conflict of interest transactions
Florida Statutes §605.04093 Limitation of liability of managers and members
You may want to read Four Reasons the Facebook Fortune Is Going Into an LLC.
Have a good weekend.
Week 3: January 25-29 We are only about 15 pages behind where I predicted at this point, which isn’t too bad! I am going to ask you to read to page 128 for Tuesday and page 163 for Thursday.
Remember that last week I asked you specifically to read the Florida version of RUPA §202 (Fl. Statutes §620.8202) for Holmes v Lerner, RUPA §306 (Fl. Statutes §620.8306) with respect to liability of partners in general and limited liability partnerships, RUPA §401 (Fl. Statutes §620.8401) with respect to rights and duties of partners, RUPA §404 (Fl. Statutes §620.8404) on the duties owed by partners and RUPA §103 (Fl. Statutes §620.8103) on non-waivable provisions of the Act.
Please note that we will spend time in class focusing on the wording of RUPA s 103 and discuss what sort of provisions for contracting around the fiduciary duties may be effective.
Now here are Selected Florida RUPA provisions: dissociation, buyout, dissolution which I would also like you to read.
Have a good weekend.
Week 2: January 19-22 We will begin next Tuesday morning with the Ecco Bella case on page 49 of the Casebook. I said in class today (Jan. 14) that I would like you to read to page 97 for Tuesday’s class. This is a bit ambitious, perhaps, but we will see how it goes. For Thursday please read to page 112.
The Agency materials in the book refer to the Restatements of Agency. Partnership law is set out in statutes and the Florida Partnership Statute is based on RUPA (rather than UPA(1914)). You can find information about which states have enacted RUPA based statutes here. I think it is a good idea to read the statute, but I particularly recommend that you read the following provisions: the Florida version of RUPA §202 (Fl. Statutes §620.8202) for Holmes v Lerner, RUPA §306 (Fl. Statutes §620.8306) with respect to liability of partners in general and limited liability partnerships, RUPA §401 (Fl. Statutes §620.8401) with respect to rights and duties of partners, RUPA §404 (Fl. Statutes §620.8404) on the duties owed by partners and RUPA §103 (Fl. Statutes §620.8103) on non-waivable provisions of the Act.
I added links to these specific statutes to the materials page.
I have transferred the material that was previously on this page to the archive page
Have a good weekend.
First Class Assignment (Tuesday 12 January, 2016): Please read to page 35 of the Casebook.
For the rest of the first week of class please read to page 65 of the Casebook.
Here are the Business Associations Class Policies 2016
As of January 10, 2016 the looseleaf edition of the casebook is available at Amazon for $159. I am not assigning a separate statutes book to save expense and am providing links to the statutes on the class materials page. Sometimes I will ask you to read specific statutes that I will link to from the blog. Please do actually read the statutes.
If we cover all the material to page 65 on Thursday January 14 I would expect to assign pages 67-152 for the second week of class.
This is the second time I have used this Casebook. Last Spring I basically followed the organization of the Casebook up to Chapter 12 and then covered later chapters selectively. But last Spring we met 3 times per week which amounts to a larger number of class minutes for the semester than we get by meeting twice per week. I generally prefer to teach BA in 3×1.5 hour sessions and have not taught the class in 2×2 hour sessions for a number of years. I find the 2×2 hour sessions are less efficient (and we have less class time). This means that I will need to make some adjustments so that the coverage of the material will not exactly track the coverage from last spring.