Business Associations Outline

 I. Corporations (p.1-10)

A. Sole Proprietorship

1. Total risk, rewards & control

B. Partnership

1. Shared risk, rewards, & control

2. Atty to partnership frought w/potential conflicts on interest.

C. Corporation

1. Reduced personal liability

a. Good against tort creditors.

b. Lenders are going to want payment assurances.

2. Double taxation; at corp level & at shareholder level after dividends.

3. Subchapter S Corp

a. Hybrid form--a corp treated like a partnership

b. No double taxation.

4. How Corp Formed: Del 101(b): A corp may be incorp'd or organized to conduct or promote any lawful business or purposes.

D. Fowler v. Penn Tire (5th Cir. 1964): Supplier/retailer agreement. After retailer goes bankrupt, supplier seeks return of the merchandise rather than letting creditors have it. Ct looks to terms of the contract and to the actual business dealings bet the two in order to determine the type of relationship they had, b/c type of dealings determines who the merchandise goes to.

1. Case illustrates the different problems which can be presented by alternative methods of organizing relations between companies, which easily c/h/b avoided w/more definitive contract drafting and business dealings bet the parties consistent with the contract.

2. Who bears the loss will usually be determined by the contract bet the corps & if not, then from the form of the deal._II. Business Associations

A. Agency Relationships (p.10-18, 23-36)

1. Master/Agent Relationship

a. Agent has power to bind the master

b. Corp agents are empowered to act on behalf of the corp; their actions bind the corps.

c. Agency agreement can create conditions w/in which the agent must act.

d. Apparent Authority: auth to act need not be actual, if the authority is apparent, it may be enough to bind the principle.

e. Employees v. Independent Contractors

(1) Look to control, duration, who provides equipment, responsibility for actions, ... to determine whether or not agency relationship exists.

(2) The greater the degree of control, the more responsibilty.

f. Master/servant relationship exists where servant has agreed to work on behalf of the master, & to be subject to the master's control or right to control the physical conduct of the servant (ie. the manner in which the job is perf'd).

2. Humble Oil (Tex. 1949): Under the doctrine of respondeat superior, a master is liable for the torts of its servants. A master/servant relationship exists where the servant has agreed to work on behalf of the master & subject to the master's control.

a. The K bet Humble & the operator as a whole indicates a master/servant relationship: the operator is req'd "to make reports and perform other duties in connection with the operation of said station that may be req'd of him from time to time by the Co.".

b. B/c of existence of agency relationship corp held liable for neg of employee. If employee an independent contractor, no liability for corp.

3. Hoover v. Sun Oil (Del. 1965): B/c corp had no control over the details of day-to-day ops, no liability can be imputed to it from the neg acts of the employee.

a. The test to be applied is whether the corp has retained the right to control the details of the day-to-day operation of the station; control over results alone being viewed as insufficient.

b. The relationship bet the parties does not depend upon what the parties themselves call it, but rather what it actually is.

4. Jenson Farms v. Cargill (Minn. 1981): Restat of Agency: a creditor who assumes control of his debtor's business may become liable as principal for the acts of the debtor in connection w/the bus.

a. Some of the elements used to established the principal/agent relationship are found in an ordinary debtor/creditor relationship. However, these factors cannot be considered in isolation, but, rather, they must be viewed in light of all the circum surrounding the relationship.

b. Creditor knows best the financial position of the debtor, and t/f is in best position to protect themself. When they don't take defensive action, but rather take control of debtor's business they are more likely to be held a principle & t/f liable for debtors other debts.

5. Lind v. Schenley Ind (3d Cir. 1960): Apparent authority.

a. Types of Agent Authority: Actual Authority means, as the words connote, authority that the principal, expressly or implicitly, gave the agent. Apparent Authority arises when a principal acts in such a manner as to convey the impression to a 3rd party that an agent has certain powers which he may or may not actually possess. Inherent/Implied Authority has been held to be actual authority given implicitly by a principle to his agent or the kind of authority arising solely from the designation by the principal of a kind of agent who ordinarily possess certain powers.

B. Partnerships

1. Partnerships can be structured so as to resemble a corp in may respects, incl: control, lifespan, transferability, & taxation

2. Fenwick v. Unemp Comp Comm (N.J. 1945): The burden of establishing a partnership is upon the one who alleges it to exist.

a. Elements that cts will take into consideration in determining the existence or non-existence of a partnership relation:

(1) the intention of the parties;

(2) the right to share in profits;

(3) the obligation to share in losses (Risk);

(4) the community of power (Control);

(5) the language of the agreement;

(6) the conduct of the parties toward 3rd persons; &

(7) the rights of the parties upon dissolution.

b. The UPA defines a partnership as an assoc of 2 or more persons to carry on as co-owners a business for profit.

c. The UPA provides that sharing of profits is prima facie evidence of partnership, but no such inference shall be drawn if such profits were rec'd in payment as wages of an employee.

3. Martin v. Peyton (N.Y. 1927): Did the terms of a K bet 2 parties create a partnership? No. However it is true that when taken together a point may come where stipulations immaterial separately cover so wide a field that we will hold a partnership exists.

4. Meinhard v. Salmon (N.Y. 1928): The very fact that one partner was in control w/exclusive powers of direction over the partnership charged him with the duty of disclosure, since only through disclosure could the oppty be equal.

5. Bassan v. Investment Exc (Wash. 1974): Gen'l partners have a fiduciary duty towards limited partners. Once the limited partner has joined the partnership he has no effective voice in the decision-making process. He must then, be able to rely on the highest standard of conduct from the general partner.

a. The duty of loyalty resulting from a partner's fiduciary position is such that the severity of the partner's breach will not be Q'd. The Q is only whether there has been any breach at all.

6. Any agreement between the partners takes priority over UPA provisions.

7. UPA 18(e) provides that in the absence of an agreement to the contrary, all partners have equal rights in the mgmt and conduct of the partnership business.

8. UPA 18(h) provides that any differences arising as to ordinary matters connected w/the partnership business may be decided by a majority of the parts.

9. Nabisco v. Stroud (N.C. 1959): Under the UPA, 1 partner can not restrict the power & authority of the other to contract for the partnership as a going concern, if such purchase is an ordinary matter connected with the partnership business, for the purpose of its business and within its scope. T/f the purchase for the business as a going concern bound the partnership & his co-partner.

10. Day v. Sidley & Austin (D.D.C. 1975): Gen'lly, common law and stat standards concerning relationships bet partners can be overridden by an agreement reached by the parties themselves. The UPA specifically provides that rules governing the rights and duties of the partners are subject to any agreement bet them.

a. The basic fiduciary duties of partners are: (1) a partner must account to the partnership for any profit acquired in a manner injurious to the interests of the partnership; (2) a partner cannot without the consent of the other partners, acquire for himself a partnership assent, nor may he divert to his own use a partnership oppty; & (3) a partner must not compete with the partnership w/in the scope of the business.

b. The essence of a breach of fiduciary duty bet partners is that one partner had advantaged himself at the expense of the firm.

11. Owen v. Cohen (Cal. 1941): Cts of equity may order the dissolution of a partnership where there are quarrels and disagreements of such a nature and to such extent that all confidence and cooperation bet the parties has been destroyed or where one of the parties by his misbehavior materially hinders a proper conduct of the partnership business.

12. Lawlis v. Kightlinger (Ind. App. 1990): Where the remaining partners in a partnership deem it nec to expel a partner under a no-cause expulsion clause in a partnership agreement freely negotiated and entered into, the expelling partners have acted in "good faith" regardless of their motivation if that act does not cause a wrongful withholding of money or property legally due the expelled partner at the time he is expelled.

a. There is a fiduciary duty owed bet partners which reqs each to exercise good faith and fair dealing in partnership tranasctions and towards each other.

13. Partnership Formation

a. UPA 6: a partnership is an assn of 2 or more persons to carry on as co-owners a business for profit.

b. UPA 7(4): the receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but no inference shall be draw if such profits were rec'd in payment as wages.

14. Relations Among Partners

a. The rights and duties of the partners in relation to the partnership shall be determined, subject to any agreement between them,

b. UPA 18(g): No person can become a member of a partnership without the consent of all the partners.

c. UPA 21(1): Every partner must account to the partnership for any benefit, and hold as trustee for it any profits derived by him without the consent of the other partners from any transaction connected with the formation, conduct, or liquidation of the partnership or from any use by him of its property.

15. Relations With Outsiders

a. UPA 9(1): every partner is an agent of the partnership for the purpose of its business, and the act of every partner, for apparently carrying on in the usual way of business of the partnership, binds the partnership, unless the partner so acting has in fact no authority to act for the partnership in the particular matter, and the person with whom he is dealing has knowledge of the fact that he has no such authority.

b. UPA 13: Where, by any wrongful act or omission of any partner acting in the ordinary course of the business of the partnership or with the authority of his co-partners, loss or injury is caused to any person, not a partner in the partnership, or any penalty is incurred, the partnership is liable therefor to the same extent as the partner so acting or omitting to act.

c. UPA 15: all partners are liable (a) jointly and severally.

d. UPA 17: a person admitted as a partner into an existing partnership is liable for all obligations of the partnership arising before his admission as though he had been a partner when such obligations were incurred, except that this liability shall be satisfied only out of partnership property.

e. UPA 36(1): The dissolution of the partnership does not of itself discharge the existing liability of any partner.

16. Dissolution

a. UPA 29: The dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the business.

b. UPA 30: on dissolution the partnership is not terminated, but continues until the winding up of partnership affairs is completed.

c. UPA 31: Dissolution is caused, inter alia: by the express will of any partner; by the expulsion of any partner from the business; or by the death of any partner.

d. UPA 32: On application by or for a partner the ct shall decree a dissolution whenever a partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the business; or a partner willfully or persistently commits a breach of the partnership agreement, or otherwise conducts himself in matters relating to the partnership business that it is not reasonably practicable to carry on the business in partnership w/him.

C. Limited Partnerships

1. Structuring a partnership to get limited liability.

2. Can limit control as well.

3. General partners are personally liable for the debts of the firm, have the power to act on behalf of the firm, & control it.

4. Limited partners do not participate in control, do not have the power to act for the firm, and are not personally liable for the debts of the firm.

5. ULPA 101(7): Limited partnership means a partnership formed by 2 or more persons and having one or more general partners and one or more limited partners.

6. ULPA 201(a): In order to form a limited partnership, a certificate of limited partnership must be executed & filed in the office of the Secy of State

7. ULPA 302: The partnership may grant to all or a specified group of the limited partners the right to vote upon any matter.

a. Depending on the extent of what the limited partners may vote on, they may be held to have control under ULPA 303.

8. ULPA 303(a): a limited partner who participates in control is liable only to persons who transact business with the limited partnerhip reasonably believing, based upon the limited partner's conduct, that the limited partner is a general partner

9. ULPA 303(b) a limited partner does not participate in control solely be consulting with and advising a general partner with respect to the business of the limited partnership.

D. Selection of the Form of the Business Enterprise

1. Corporations

a. Separation of ownership & control.

b. Equity investors have limited liability.

c. Can begin & end ownership interest at will.

d. Law conceives of corp as a being.

_III. The Corporate Entity

A. Legal Formalities

1. Promoter: a person who identifies a business oppty & puts together a deal, forming a corp as the vehicle for investment by others.

2. Southern Gulf-Marine (La. App. 1982): It is settled, that one who Ks w/what he acknowledges to be & treats as a corp, incurring obligations in its favor, is estopped from denying its corp existence, particularly when the obligations are sought to be enforced.

a. Casey v. Galli, 94 U.S. 673 (1877): Where a party has contracted w/a corp, & is sued upon the K, neither is permitted to deny the existence or the legal validity of such corp.

3. The Formation Process

a. Mechanical process

b. Failure to comply w/mechanics can result in shareholders forfeiting their limited liability on the ground that it is a de facto partnership.

c. Cert of Incorp must be filed w/state

(1) Corp's powers & purposes

(2) Classes of stock & the rights of the stock to be issued.

(3) Agent for service of process

d. Directors named in cert, if named, meet to write by-laws

4. Cert of Incorp: Del 102: The cert of incorp must set forth: name, address, nature or purposes of the business, authorized stock, name & address or the incorporator. Permissible, optional, inclusions are: the directors, provisions for conducting the affairs of the corp, limit on duration of corp, &

a. Del 102(b)(7): A provision eliminating or limiting the personal liability of a director to the corp or its stockholders for monetary damages for breach of fiduciary duty (of care) as a director, provided that such provision shall not eliminate the liability of a dir (i) for any breach of the dir's duty of loyalty to the corp.

5. Powers of Incorporators: Del 107: if the persons who are to serve as dir's until the 1st annual meeting have not been named in the cert of incorp, the incorporator shall manage the affairs of the corp, including adoption of the by-laws, until the election of the dir's.

6. By-Laws: Del 109: After a corp as rec'd any payment for any of its stock, the power to adopt, amend, or repeal by-laws shall be in the stockholders entitled to vote.

a. 109(b): The by-laws may contain any provision, not inconsistent w/law or the cert of incorp relating to the business of the corp, the conduct of its affairs, and its rights or powers or the rights of powers of its stockholders, dir's, officers, or employees.

7. Components of Capital Structure

a. Bonds: long-term obligation secured by a mortgage on some property of the issuer, paying a fixed amount of interest at regular intervals.

(1) Indenture trustee: protects the interests of the bondholders, ordinarily a bank.

b. Debenture: long-term unsecured obligation

c. Private placement: borrowing from a single lender or a small number of lenders subject to bargaining bet the parties. Allows for nonstandardized terms.

d. Common stock

(1) Equity interest in the corp--upon liquidation will be entitled to residual after payment to Sr. creditors

(2) No set duration--up to shareholder

(3) High risk

(4) Right to elect dir's--control.

(5) Dividends--share in current earnings.

_ B. Limited Liability

1. Walkovszky v. Carlton (N.Y. 1966): Taxi cab hit/run

a. Only when someone uses contol of the corp to further his own rather than the corp's business, will he be liable for the corp's acts upon the principle of respondeat superior applicable even where the agent is a natural person

b. The law permits the incorp of a business for the very purpose of enabling its proprietors to escape personal liability, but the privilege is not w/o its limits. Broadly speaking, cts will disregard the corporate form, pierce the corporate veil, whenever nec to prevent fraud or to achieve equity.

c. Either the stockholder is conducting the business in his individual capacity or he is not. If he is, he will be liable; if he is not, then it does not matter.

2. Victoria Elevator v. Meriden (Minn. 1979): Doing business in a corp form in order to limit indiv liability is not wrong; it is one of the main reasons for incorporating. But where the formalities of corp existence are disregarded by one seeking to use it, corp existence cannot be allowed to shield the indiv from liability for damages incurred by those dealing with the corp.

a. Cts are concerned with reality and not form, with how the corp operated and the indiv Ds relationship to that operation.

b. Factors include: insufficient capitalization for purposes of corp undertaking, failure to observe corp formalities, nonpayment of dividends, insolvency of debtor corp at time of transaction in Q, siphoning of funds by dominant shareholdr, nonfxning of other officers and directors, absence of corp records, and existence of corp as merely a facade for indiv dealings.

c. Disregard of the corp entity reqs not only that a number of these factors be present, but also that there be an element of injustice or fundamental unfairness.

3. Sea-Land v. Pepper Source (Ind. App. 1990): A corp entity will be disregarded and the veil of limited liability pierced when 2 reqs are met: (1) there must be such unity of interest & ownership that the separate personalities of the corp & the indiv no longer exists; & (2) circum must be such that adherence to the fiction of separate corp existence would sanction a fraud or promote injustice.

a. As for determining whether a corp is controlled by another to justify disregarding their separate identities focus on: (1) the failure to maintain adequate corp records or to comply w/corp formlities; (2) the commingling of funds or assets; (3) undercapitalizatn; & (4) one corp treating the assets of another corp as its own.

C. Corporate Purpose

1. Shlensky v. Wrigley (Ill. App. 1968): Absent fraud or breach of fiduciary duty, defer to the business judgment of the Board. Presumption of good faith. THE BUSINESS JUDGMENT RULE

a. IL: the majority of shareholders or their agencts must be permitted to control the business of the corp in their discretion, when not inviolation of its charter or some public law, or corruptly and fraudulently subversive of the rights and interests of the corp.

b. DE: It is not the fxn of the cts to resolve for corps Qs of policy and business mgmt. The directors are chosen to pass upon such Qs and their judgment, unless shown to be tainted with fraud, is accepted as final. The judgmt of the dir's of corps enjoys the benefit of a resumption that it was formed in good faith and was designed to promote the best interests of the corp they serve.

2. Purposes: Del 101(b) A corp may be organized it conduct or promote any lawful business or purpose.

3. Cert of Incorp: Del 102(a)(3): The cert of incorp shall set forth the nature of the business or purposes to be conducted. It shall be sufficient to state that purpose of the corp is to engage in any lawful activity for which corps may be organized.

4. Specific Powers: Del 122(9): Every corp shall have the power to make donations for the public welfare or for charitable, scientific or educ'l purposes. see NY 202(a)(12).

5. Del 122(12): Every corp shall have the power to transact any lawful business which the corps board of dir's shall find to be in aid of gov'l authority._IV. The Corporate Entity & Its Creditors

A. Dividends & Distributions

1. Cash dividends: are essentially a distribution to the shareholders of the income earned or the gains made by the corp. They represent to the shareholders a return on their equity investment.

a. May be paid w/shares of stock.

2. Distribution: a direct or indirect transfer of $$ or other property or incurrence of indebtedness by a corp to or for the benefit of its shareholders. It may take the form of a dividend, a purchase, redemption or acquisition of shares, or distribution of indebtedness.

a. Limited by state stat in order to preserve the corp's stated capital nec to protect creditors.

3. Stock repurchase: involves a flow of assets out of the corp & into the hands of the shareholders. The corp is reacquiring its shares, &, in exchange, the shareholders are rec'g corp assets. A Distribution.

a. repurchased shares become treasury shares. Corp may not vote treasury shares. Del 160(c).

4. Factors affecting decision to make distributions: available cash resources, projected earnings, anticipated cash flows, projected operating &/or expansion costs, impact of distributions on market price of stock, interest in courting shareholder approval, possible contractual restraints, inflationary cost needs, and contingency needs.

5. Consideration for stock--Del 153(a): Shares w/a par value may be issued for such consideration, having a value not less than the par value thereof; (b) shares w/o a par value may be issued for such consid as is determined by the Board; & (c) Treasury shares may be disposed of by the corp for such consid as may be deter'd by the Board.

6. Corp Ownership of Stock: Del 160(a)(1): Every corp may purchase, redeem, own, sell, and deal in & w/its own shares, provided, that no corp shall purchase or redeen its own shares of capital stock for case or other property when the capital of the corp is impaired.

7. Dividends: Del 170(a): The dir's, subject to cert of incorp restrictions, may declare and pay dividends either (1) out of its surplus, or (2) in case there shall be no such surplus, out of its net profits for the fiscal yr in which the dividend is declared &/or the preceding fiscal yr.

a. Capital surplus: amounts paid to a corp in excess of the par value of stock. Add'l paid-in capital. Insures that the amount of net assets which are at least equal to paid-in capital be retained w/in the corp to meet the claims of creditors.

8. Dividends: NY 510(a): A corp may declare & pay dividends or make other distributions except when currently the corp is insolvent or would be made insolvent, or when the distribution w/b contrary to any cert of incorp restrictions. (b): Dividends may be paid out of surplus only, so that the net assets of the corp remaining after such distribution shall at least equal the amount of stated capital.

_V. Fiduciary duties of Directors

A. Duty of Care--Basics

1. Kamin v. AmEx (N.Y. App. Div. 1976): A complaint which alleges merely that some course of action other than that pursued by the board of directors would have been more advantageous gives rise to no cognizable cause of action.

a. The directors are entitled to exercise their honest business judgment on the info before them, & to act w/in their corp powers. That they may be mistaken, that other courses or action might benefit some shareholders more than others presents no basis for the superimposition of judicial judgment, so long as it appears that the directors have been acting in good faith. The ct will not interfere unless a clear case is made out of fraud, oppression, arbitrary action, or breach of trust.

2. Francis v. UJB (N.J. 1981): A determination of the liability of a director reqs findings that the dir owed a duty, that there was a breach of that duty, & that the breach was the proximate cause of the loss.

a. It is incumbent upon directors to discharge their duties in good faith & w/that degree of diligence, care, & skill which ordinarily prudent men would exercise in like positions.

b. The nature and extent of reasonable care depends upon the type of corp, its size, and its financial resources.

c. B/c dir's are bound to exercise ordinary care, they can't set up as a defense lack of knowledge needed to exercise the requisite degree of care; they should either acquire it or resign

d. Directors may not shut their eyes to corp misconduct, they have an affirmative duty to make a reasonable investigation

e. A dir can absolve himself from liability by informing the other directors of the impropriety and voting for a proper course of action.

3. Duty of Directors: NY 717(a): a dir shall perform his duties in good faith & w/that degree of care which an ordinarily prudent person in a like position would use under similar circum. In performing his duties, a dir is entitled to rely on info, opinions, & reports.

a. Codification of ordinary prudent person standard

4. Graham v. Allis-Chalmers (Del. Ch. 1963): In the last analysis, the Q of whether a corp director has become liable for losses to the corp through neglect of duty is determined by the circumstances.

a. Dir's are entitled to rely on the honesty and integrity of their subordinates until something occurs to put them on suspicion that something is wrong. If such occurs and goes unheeded, then liability of the directors might well follow, but absent cause for suspicion there is no duty upon the directors to install and operate a corp system of espionage to ferret out wrongdoing which they have no reason to suspect exists.

5. Del 102(b)(7): A corp's cert of incorp may contain a provision eliminating or limiting the personal liability of a director to the corp or its stockholders for monetary damages for breach of fiduciary duty (of care) as a director, provided that such provision shall not eliminate the liability of a dir (i) for any breach of the dir's duty of loyalty to the corp.

6. Indemnification of Officers: Del 145(a): A corp shall have the power to indemnify any person who was or is a party to a law suit by reason of the fact that he is or was a dir or employee of the corp, against expenses, fees, judgments, & fines, if he acted in good faith & in a manner he reasonably believed to be in the best interests of the corp.

7. Del 145(g): A corp shall have the power to purchase insurance on behalf of any director, officer or employee of the corp, against any liability asserted against him & incurred by him in any such capacity, whether or not the corp would have the power to indemnify him against such liability.

B. Duty of Care--Shareholder Derivative Actions

1. Auerbach v. Bennett (N.Y. 1979): Special litigation committee, composed of disinterested dir's, decided that it w/b in the best interests of the corp not to proceed w/shareholder's derivative suit.

a. The determination of the special litigation comm forecloses further judicial inquiry in this case. Cts have consistently held that the business judgment rule applies where some directors are charged with wrongdoing, so long as the remaining directors making the decisions are disinterested and independent.

b. The business judgment rule does not foreclose inquiry by the cts into the disinterested independence of those members of the board chosen by it to make the corp decision on its behalf. The rule only shields the deliberations & conclusions of the chosen reps of the board only if they possess a disinterested indep & do not stand in a dual relation which prevents an unprejudicial exercise of judgment.

c. The business judgment doctrine is grounded in the prudent recognition that cts are ill equipped & infrequently called on to evaluate what are & must be business judgments.

d. While the ct may properly inquire as to the adequacy & appropriateness of the comm's investigative procedures & methodologies, it may not under the guise of consid of such factors trespass in the domain of business judgment.

2. Board's Powers: Del 141(c): The Board of Dir's may, by resolution passed by a majority of the whole board, designate committees. ... Any such comm, to the extent provided in the resolution or in the corp by-laws, shall have & may exercise all the powers & authority of the Board in the mgmt of the business & affairs of the corp.

3. Zapata Corp v. Maldonado (Del. 1981): After an objective & thorough investigation of a derivative suit, an independent comm may cause its corp to file a motion for dismissal. The basis of the motion is the best interest of the corp, as determined by the comm. The Chancery Ct should apply a 2-step test to the motion: (1) the ct should inquire into the independence and good-faith of the comm & the bases supporting its conclusions; the corp has the burden of proving indep, good faith and reasonable investigation; & (2) the ct should determine, applying its own independent business judgment, whether the motion s/b granted. If the Ct's independent business judgment is satisfied, the ct may proceed to dismiss the derivative suit.

a. If corps can consistently wrest bona fide derivative actions away from well-meaning shareholders through the use of the committee, the derivative suit will lose much of its gen'lly recognized effectiveness as an intra-corp means of policing the board. However, if corps are unable to rid themselves of meritless or harmful litigation, the derivative action, created to benefit the corp, will produce the opposite result. It thus appears desireable to find a balancing point where bona fide stockhldr power to bring corp causes of action cannot be unfairly trampled on by the board, but the corp can rid itself of detrimental litigation.

b. The business judgment rule is a judicial creatn that presumes propriety, under certain circum, in a Bd's decision. It is gen'lly used as a defense to an attack on decision's soundness.

4. Committee's analysis may entale a conflict of interests & t/f a breach of duty of loyalty.

C. Duty of Loyalty--Basics

1. When a ct invokes the business judgment rule, the D dir's alost always win. However, cts will invoke it only, inter alia, if the dir's have not violated their duties or care & loyalty.

2. Bayer v. Beran (N.Y. Sup. Ct. 1944): Celanese Hour.

a. Dir's are given wide latitude of action, and b/c of this, the law will not hold directors liable for honest errors, or mistakes of judgment. However, the business judgment rule yields to the rule of undivided loyalty. This rule is designed to obliterate all divided loyalties which may creep into the fiduciary relationship. Included w/in its scope is every situation in which a trustee chooses to deal w/another in such close relation w/the trustee that possible advantage to such other person might influence, either consciously or unconsciously, the judgment of the trustee.

b. The fiduciary must subordinate his individual and private interests to his duty to the corp whenever the 2 conflict.

c. It is not improper to appoint relatives to responsible corp positions. However, the motives of the board may be called into Q b/c of the possible conflict with the duty owed to the corp. That being so, the entire transaction must be subjected to the most rigorous scrutiny to determine whether the action of the directors was intended or calculated to subserve some outside purpose, regardless of the conseq to the co, & in a manner inconsistent w/its interests.

3. Yablon's Rule: (1) if a conflict of interests or bad faith exists, no business judgment rule; (2) rather Ds must prove the intrinsic fairness of the transaction; (3) unless the transaction has been ratified by the shareholders or by the disinterested dir's. When this happens, the burden of proof of unfairness shifts back to the P.

4. Lewis v. SLE (2d Cir. 1980): In breach of fiduciary cases, the burden is on the board to prove that the questioned transaction was fair and reasonable (i.e. intrinsic fairness)

a. The business judgment rule places a heavy burden on shareholdrs who would attack corp transactns. But the rule presupposes that the directors have no conflict of interest. When a shareholder attacks a transaction in which the directors have an interest other than as directors of the corp, the directors may not escape review of the merits of the transaction. At common law, such a transaction was voidable unless shown by its proponent to be fair & reasonable to the corp.

5. Interested Directors: Del 144: No K or other transaction bet a corp & 1 or more of its dir's, or bet a corp & any other entity in which 1 or more of its corp's dir's are dir's or officers, or have a substantial financial interest shall either be void or voidable solely for this reason, (1) if the material facts as to such dir's interest are disclosed or known to the board or comm, & the board or comm approves the transaction; or (2) the material facts are disclosed to the shareholders entitled to vote & the transaction is approved by shareholder vote; or (3) even w/o disclosure, the transaction is fair (& reasonable) as to the corp as of the time it is authorized. see also N.Y. 713(a)_ D. Duty of Loyalty--Corporate Opportunities

1. Taking opptys available to the corp for personal use.

a. Look to the line of business the corp is in & to the expectency of the corp. Is the oppty w/in the corp line of business? Is this something we would expect the corp to do?

2. Energy Resources v. Porter (Mass. App. 1982):Before a person invokes refusal to deal as a reason for diverting a corp oppty, he must unambiguously disclose that refusal to the corp to which he owes a duty, together with a fair statement of the reasons for that refusal.

a. For the reason that the firmness of a refusal to deal cannot be adequately tested by the corp exec alone, it has not been favored as a defense unless the refusal has 1st been disclosed to the corp. W/o full disclosure it is too difficult to verify the unwillingness to deal & too easy for the exec to induce the unwillingness.

b. Other Examples: (1) the credit weakness of the corp does not permit a director to turn to his own account purchases which w/h/b advantageous to the corp; (2) disclosure of the availability of a line of business, that although new to the corp, was w/in its mfg'ing capacity is required; & (3) a director is required to inform a corp that the loss of certain business is imminent.

c. Erco got lost profits as damages.

3. Fliegler v. Lawrence (Del. 1976): shifting burden of proof:

a. P must show conflict of interests of bad faith;

b. D must show intrinsic fairness or ratification by disinterested dir's or shareholders;

c. P must show deal unfair.

d. Even though shareholders ratified the K in this case, the burden remained on D b/c he was a majority shareholder & influenced the vote.

e. Gottlieb (Del. Ch. 1952): shareholder ratification of an interested transaction, although less than unanimous, shifts the burden of proof to the objecting shareholder to demonstrate that the terms are so unequal as to amount to a gift or waste of corp assets.

E. Duty of Loyalty--Obligation of Majority Shareholders

1. Majority shareholders have fiduciary duties:

a. Vote on Board of Directors

b. Ratify decisions of the Board

c. Have sway/leverage over the Board

d. Realistic

2. Sinclair Oil v. Levien (Del. 1971): Rule: When the situation involves a parent & a subsidiary, w/the parent controlling the transaction & fixing the terms, the test of intrinsic fairness, with the resulting shifting of the burden of proof is applied. The basic situation for the application of the rule is the one in which the parent has received a benefit to the exclusion & at expense of subsidry.

a. Standard of intrinsic fairness: involves both a high degree of fairness and a shift in the burden of proof. The burden is on the corp to prove, subject to careful judicial scrutiny, that its transactions were objectively fair.

b. Self dealing occurs when the parent, by virtue of its domination of the subsidiary, causes the sub to act in such a way that the parent receives something from the sub to the exclusion of, & detriment to, the minority shareholders of the subsidiary.

3. Pepper v. Litton (U.S. 1939): A dir is a fiduciary. ... So is a dominant or controlling shareholder or group of stockholders.... Their powers are in trust.... Their dealings with the corp are subjected to rigorous scruting & where any of their contracts or engagements w/the corp is challenged the burden in on the dir or shareholder not only to prove the good faith of the transaction but also to show its inherent fairness from the viewpoint of the corp & those interested therein.

4. Zahn v. Transamerica (3d Cir. 1947): The majority shareholder has the right to control; but when it does so, it occupies a fiduciary relation toward the minority, as much as the corp itself or its officers & directors.

a. There is a radical diff when a stockholder is voting strictly as a stockholder and when voting as a director; that when voting as a stockholder he may have the legal right to vote with a view of his own benefit and to represent himself only; but that when he votes as a director he represents all the stockholders in the capacity of a trustee for them and cannot use his office as a director for his personal benefit at the expense of the stockholders.

_VI. The Distribution of Corporate Powers

A. Shareholder Powers

1. By-Laws: Del 109(a): After a corp has rec'd any payment for any of its stock, the power to adopt, amend or repeal by-laws shall be in the stockholders entitled to vote.

2. Board of Dir's: Del 141(k) Any dir or the entire board may be removed w/ or w/o cause, by the holders of a majority of the shares then entitled to vote at an election of directors.

a. In the case of a corp whose board is classified shareholders may effect such removal only for casue.

3. Officers: Del 142(b): officers shall be chosen in such manner & shall hold their offices for such terms as are prescribed in the by-laws.

4. Stockholder Meetings: Del 211(d): Special meetings of the stockholders may be called by the board or by such person(s) as may be authorized by the by-laws or cert of incorp.

5. Director Vacancies: Del 223(a): Unless otherwise provided in the by-laws or cert of incorp, (1) vacancies & newly created directorships ... may be filled by a majority of the dir's then in office. (2) If at any time, a corp should have no dir's in office, then any officer or any stockholder may call a special meeting of stockholders.

6. Consent of Stockholders: Del 228(a): Any action may be taken w/o a special stockholder meeting if a consent shall be signed by the holders of outstandng stock having not less than the minimum number of votes nec to authorize or take such action.

7. Cert of Incorp Amendment: Del 241(a): Before a corp has rec'd any payment for any of its stock, it may amend its cert of incorp at any time & in any respects desired (b) upon approval of either the incorporators or the board.

8. Del 242(a): After a corp has rec'd payment for any of its capital stock, it may amend its cert of incorp in any lawful respect, (b)(1) after the Board has adopted a resolution setting forth the amendment and the stockholders ratify it.

9. Merger: Del 251(b): The board of each corp which desires to merge or consolidate shall adopt a resolution approving an agreement of merger or consolidation. (c) The agreement shall be submitted to the stockholders of each constituent corp for vote on the merger. Under certain circum, shareholder vote not nec. Del 251(f).

10. Sale of Corp Assets: Del 271(a): Every corp may sell, lease or exchange all or substantially all of its assets when & as authorized by a resolution adopted by the holders of a majority of the outstandng stock entitled to vote thereon.

11. Dissolution: Del 275(a): If it s/b deemed advisable in the judgment of the Board that the corp s/b dissolved, the board, after the adoption of a resolution shall cause notice to be mailed to each stockholder entitled to vote thereon. (b) At the meeting a vote shall be taken upon the proposed dissolution.

B. Proxy Control

1. Under corp law, shareholders may appoint an agent to attend the shareholder meeting and vote on their behalf. That agent is the shareholder's proxyholder; the document by which the shareholder appoints the agent is the proxy. B/c the outcome of the meetings depends on the # of votes cast, the person w/the most proxies usually wins.

2. Proxy fights result when an insurgent group tries to oust incumbent managers by soliciting proxy cars & electing its own representatives to the board.

3. Levin v. MGM (S.D.N.Y. 1967): The present mgmt may use corp funds in the solicitation of proxies against an insurgent group. The use of funds is protected by business judgment of board.

a. The decision as to the continuance of the present mgmt rests entirely with the stockholders. It is the concern of the law & the cts that they be fully and truthfully informed as to the merits of the contentions of those soliciting their proxy.

4. Rosenfeld v. Fairchild (N.Y. 1955): In a contest over policy, as compared to a purely personal power contest, corp directors have the right to make reasonable & proper expenditures, subject to the scrutiny of the cts, from the corp treasury for the purpose of persuading the stockholders of the correctness of their position & soliciting their support for policies which the directors believe, in all good faith, are in the best interests of the corp. The stockholders, moreover, have the right to reimburse successful contestants for the reasonable and bona fide expenses incurred by them in any such policy contest, subject again to ct scrutiny.

a. Mgmt may look to the corp treasury for the reasonable expenses of soliciting proxies to defend its position in a bona fide contest.

b. When the dir's act in good faith in a contest over policy, they have the right to incur reasonable and proper expenses for solicitation of proxies and in defense of their corp policies, and are not obliged to sit idly by.

5. Regulation of Proxy Fights

a. Sec 14(a) of the 1934 Act prohibits people from soliciting proxies in violation of SEC rules.

b. The rules req people who solicit proxies to furnish each shareholder with a proxy statement. In it, they must disclose information that may be relevant to the decision the shareholder must make.

c. When an insurgent group wants to contest mgmt & solicit proxies, rule 14a-7 gives mgmt a choice: it can either mail the insurgent group's material to the shareholders directly & charge the group for the cost, or it can give the group a copy of the shareholder list.

C. Private Actions

1. J.I. Case v. Borak (U.S. 1964): Cong passed 14(a) to prevent mgmt or others from obtaining authorizatn for corp action by means of deceptive or inadequate disclosure in proxy solicitation.

a. Sec 14(a): it shall be unlawful for any person to solicit any proxy in contravention of the rules & regs of the SEC.

b. Sec 27: The Dis Cts of the US shall have exclusive juris of violations of this title & the rules & regs thereunder, and of all suits in equity and actions at law brought to enforce any liability or duty hereby created.

c. 17 CFR 240.14a-9: no proxy solicitation shall be made which is false or misleading w/respect to any material fact, or which omits to state any necessary material fact.

d. Private parties have a right under sec 27 to bring suit for violations of sec 14(a).

e. The injury which a stockholder suffers from corp action pursuant to a deceptive proxy solicitatn ordinarily flows from the damage done the corp, rather than from damage inflicted directly upon the stockholder. To hold that derivative actions are not w/in the sweep of the section w/b tantamount to a denial of private relief.

2. Mendell v. Greenberg (2d Cir. 1990): A proxy statement need not disclose the underlying motivations of a director or major shareholder so long as all the objective material facts relating to the transaction are disclosed.

a. An ommitted or concealed fact is material when there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. If a reasonable shareholder would have viewed dislosure of an ommitted fact as having significantly altered the total mix of information made available then that fact is material.

b. Scienter: Although shareholders contesting a proxy solicitation must prove that the material was false or misleading, they need not show that the D used the material intentionally. They must show some fault, but neg will gen'lly suffice.

c. Only when the proxy statement fully & fairly furnishes all the objective material facts as to enable a reasonably prudent stockholder to make an informed investment decision is the fed purpose in the securities law served.

D. Shareholder Proposals

1. SEC rule 14a-8: If any security holder of a corp notifies the corp of his intention to present a proposal for action at a forthcoming shareholder's meeting, the corp shall set forth the proposal in its proxy statement

2. SEC Rule 14a-8(c)(1): A corp may omit a shareholder proposal and any statement in support thereof from its proxy statement & form of proxy under any of the following circu: (1) if the proposal is, under the laws of the corps, domicile, not a proper subject for action by security holders. (i.e. something exclusively w/in the province of the board).

3. Lovenheim v. Iroquois Brands (D.D.C. 1985): Shareholder proposal held not to be excludable even though related to less than 5% of corp's operations.

a. SEC Rule 14a-8(c)(5): A corp may omit a proposal and any statement in support thereof from its proxy statement, if the proposal relates to operations which account for less than 5% of the issuer's total assets at the end of its most recent fiscal year, and is not otherwise significantly related to the corp's business.

b. The "otherwise significantly related" is not limited to economic significance, and in light of the ethical & social significance of the proposal and the fact that it implicates significant level of sales, (although not 5%) the shareholder has shown that his proposal is otherwise significantly related to the corp's business.

4. SEC Rule 14a-8(c)(7): Corp may omit a proposal if the proposal deal w/a matter relating t the conduct of the ordinary business operations of the corp.

E. Shareholder Inspection Rights

1. Shareholder lists: Del 219: A corp shall prepare & make available, at least 10 days before every stockholders meeting, a complete list of the stockholders entitled to vote. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting.

2. Shareholder list: Del 220: Any stockholder shall upon writted demand under oath stating the purpose thereof, has the right to inspect fo any proper purpose a list of stockholders.

a. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockhldr_VII. Close Corporations

A. Agreements Affecting Control

1. Ringling Bros. (Del. Ch. 1947): Various forms of vote pooling agreements are valid. A group of shareholders may, w/o impropriety, vote their respective shares so as to obtain advantages of concerted action. They may lawfully contract w/each other to vote in the future in such ways as they may determine. Reasonable provisions for cases of failure of the group to reach a determination b/c of an even division in their ranks seem unobjectnable.

a. Voting trust: the transfer of title by stockholders of shares of a corp to a trustee authorized to vote the shares on their behalf.

2. McQuade v. Stoneham (N.Y. 1934): A contract by which the directors of a close corp give each other assurances that they will act in a certain way is illegal & void so far as it precludes the board of directors, at the risk of incurring legal liability, from changing officers, salaries, or policies, except by consent of the contracting parties.

a. The duty of directors is to the corp & its stockholders, to be exercised according to their unrestricted lawful judgment.

b. Stockholders may not, by agreement among themselves, control the directors in the exercise of the judgment vested in them by virtue of their office. Directors may not by agreements entered into as stockholders abrogate their duty of independent judgment to the corp.

3. Clark v. Dodge (N.Y. 1936): Where the directors are the sole stockholders, there seems to be no objection to enforcing an agreement among them to vote for certain people as officers.

a. Restricts application of McQuade to where those outside of the directors own shares & they may perceptibly be injured by the agreement among the director/shareholders.

b. If the enforcement of a particular K damages nobody--not even the public to any perceptible degree--one sees no reason for holding it illegal, even though it impinges slightly upon the broad mandate of corporate law.

c. NY 620: A provision in the cert of incorp otherwise prohibited by law b/c it improperly restricts the board in its mgmt of the business of the corp shall nevertheless be valid: (1) if all the incorporators or shareholders have authorized such provision.

4. Del 141(a): The business & affairs of every corp shall be managed by or under the direction of a board of directors, except as may otherwise be provided in the cert of incorp.

5. Agreements by which shareholders simply commit to electing themselves as directors are gen'lly considered unobjectionable & are now expressly validated in many juris.

6. Cert of Incorp: Del 102(b)(1): Cert of incorp may contain a provision for the mgmt of the business & for the conduct of the affairs of the corp & any provision defining, limiting and regulating the powers of the corp, the directors, & the stockholders.

7. Officers: Del 142(b): Officers shall be chosen in such manner & shall hold their offices for such terms as are prescribed by the by-laws or determined by the board of directors.

8. Voting Trusts: Del 218: One or more stockholders may by agreement deposit their capital stock w/a person for the purpose of vesting in such person the rights to vote thereon. Subject to 10-yr max & filing of agreement w/state.

9. Close Corp Defined: Del 342: limited to 30 shareholders, the transfer of which may be restricted, & may set forth qualifications for stockholders.

10. Agreements Restricting Directors: Del 350: A written agreement among the stockholders of a close corp is not invalid as bet the parties to the agreement, on the ground that it so relates to the conduct of the business and affairs of the corp as to restrict or interfere w/the discretion or powers of the board of dir's.

11. Mgmt by Stockholders: Del 351: The cert of incorp of a close corp may provide that the business of the corp shall be managed by the stockholders rather than by a board.

12. Close Corp as Partnership: Del 354: A written agreement among the stockholders of a close corp to treat the corp as if it were a partnership is valid.

B. Resolving Intracorporate Disagreement

1. Wilkes v. Sprinside Nursing Home (Mass. 1976): Stockholders in close corps owe one another substantially the same fiduciary duty in the operation of the enterprise that partners owe to one another.

a. The standard of duty owed by partners to one another is one of utmost good faith and loyalty. Stockholders in close corps must discharge their mgmt & stockholder responsibilities in conformity w/this strict good-faith standard. They may not act out of avarice, expediency or self-interest.

b. By terminating a minority stockholder's employment or by severing him from a position as an officer or director, the majority effectively frustrate the minority stockholder's purposes in entering in the corp venture & also deny him an equal return on his investment.

c. The majority certainly have rights to what has been termed selfish ownership in the corp which s/b balanced against the concept of the fiduciary obligation to the minority. It must be asked whether the majority can demonstrate a legitimate business purpose for its action. The controlling group in a close corp must have room to maneuver in establishing the business policies of the corp. This is open to challenge by the minority stockholder on the basis that the same legitimate objective c/h/b achieved through a less harmful alt course of action.

2. Smith v. Atlantic Properties (Mass. App. 1981): The Ct relied on Wilkes: b/c close corps resemble partnerships, the stockholders in the close corp owe one another substantially the same fiduciary duty in the operation of the enterprise that partners owe to one another. That standard of duty was the utmost of good faith and loyalty

3. Ingle v. Glamore (N.Y. 1989): A minority shareholder in a close corp, by that status alone, who contractually agrees to the repurchase of his shares upon termination of his employment for any reason, acquires no right from the corp or majority shareholders against at-will discharge. There is nothing in law, in the agreement, or in the relationship of the parties to warrant such a contradictory & judicial alteration of the employment relationship or the express agreement. It is nec in this case to appreciate and keep distinct the duty a corp owes to a minority shareholder as a shareholder from any duty it might owe him as an employee.

a. No duty of loyalty and good-faith, akin to that bet partners, precluding termination except for cause, arises among those operating a business in the corp form who have only the rights, duties and obligations of stockholders and not those of partners.

4. Custodian: Del 226 & 352: The Chan Ct may appoint a custodian if the business of the corp is suffering of is threatened w/irreperable injury b/c the dir's are so divided respecting the mgmt of the corp.

5. Provisional Director: Del 353: The Chan Ct may appoint a provisions dir for a close corp if the dir's are so divided respecting the mgmt of the corp's business & affairs.

6. Dissolution: Del 355: The cert of incorp of any close corp may include a provision granting to any stockholder an option to have the corp dissolved at will or contingent upon some occurrence.

_VIII. Transactions Involving Changes in Corp Control

A. Tender Offers & Defensive Tactics

1. Cheff v. Mathes (Del. Ch. 1964): Corp buys out greenmailer w/corp funds & debt allegedly to protect the way they do business.

a. Test: If the actions of the board were motivated by a sincere belief that the buying out of the dissident stockholder was nec to maintain what the board believed to be proper business practices, the board will not be held liable for such decision, even though hindsight indicates the decision was not the wisest course. On the other hand, if the board has acted solely or primarily b/c of the desire to perpetuate themselves in office, the use of corp funds for such purposes is improper.

b. The directors satisfy their burden by showing good faith and reasonable investigation; the directors will not be penalized for an honest mistake of judgment, if the judgment appeared reasonable at the time the decision was made.

c. Whether the fear and the defensive measures taken are reasonable are questions of the business judgment of the board.

2. Unocal v. Mesa Petroleum (Del. 1985): Unocal board took defensive measures to oppose a takeover threat it perceived to be harmful to the corporate enterprise.

a. If the board of directors is disinterested, has acted in good faith and with due care, its decision in the absence of an abuse of discretion will be upheld as a proper exercise of business judgment.

b. Business Judgment Rule is applicable in the takeover context. It involves a presumption that in making a business decision the directors of a corp have acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the corp.

c. When a board addresses a pending takeover bid it has an obligation to determine whether the offer is in best interests of the corp & sharehldrs.

d. If a defensive measure is to come w/in the ambit of the business judgment rule, it must be reasonable in relation to the threat posed. This entails an analysis by the directors of the nature of the takeover bid & its effects on the corp enterprise.

3. Revlon v. MAF (Del 1985): Under some circum there is an obligation for the board to run a fair auction. This is done to maximize shareholder value, & will usually be req'd when a sale of the co is already being contemplated.

a. While the business judgment rule may be applicable to the actions of corp dir's responding to takeover threats, the principles upon which it is founded--care, loyalty & indep--must 1st be satisfied. If the BJ rule applies, there is a presumption that in making a business decision the dir's acted on an informed basis, in good faith, & in the honest belief that the action taken was in the best interests of the corp. However, when a board implements defensive measures there arises the specter that a board may be acting primarily in its own interests rather than those of the corp & its stockhlders. This potential for conflict places upon the dir's the burden of proving that they had reasonable grounds for believing there was a danger to corp policy & effectiveness, a burden satisfied by a showing of good faith & reasonable investigation. In addition, the dir's must analyze the nature of the takeover & its effect on the corp in order to ensure balance--that the responsive action is reasonable in relation to the threat posed.

b. Constituencies: A board may have regard for various constituencies in discharging its responsibilities, provided there are rationally related benefits accruing to the stockholders. However, such concern for non-stockholders interests is inappropriate when an auction among active bidders is in progress, & the object no longer is to protect or maintain the corp enterprise but to sell it to the highest bidder.

c. Let the market do its job.

_ 4. Paramount v. Time (Del. 1989): Preventing hostile takeover v. fiduciary duty to maximize shareholder value.

a. Directors are not obliged to abandon a deliberately conceived corp plan for a short-term shareholder profit unless there is clearly no basis to sustain the corp strategy.

b. Unocal: dir's can do what they want so long as they act in good-faith for the best interest of the corp, when done after reasonable investigtn, so long as what you do is reasonably related & proportional to the threat posed.

c. Revlon: In certain circum there is an obligation for the board to run a fair auction.

(1) Duties created when: Corp initiates an active bidding process, or in response to 1 bidder's offer, the corp seeks alternate transaction involving corp breakup.

5. QVC v. Paramount (Del Ch 1993): What is critical is that the board be able to demonstrate that its business judgment was reasonable & adequately informed consistent with the enhanced judicial scrutiny applied here. It is in this sense that the dir's duties under Revlon & their fundamental due care obligation to adequately inform themselves converges.

a. P board is not permitting the shareholders to choose bet the 2 competing offers. & is t/f controlling which control premium the shareholders will receive for their stock.

b. What is at risk here is the adequacy of the protection of the property interests of shareholders who are involuntarily being made dependent upon the dir's to protect that interest. In such circum fairness & our law req that the dir's conduct be made subject to the enhanced judicial scrutiny of Unocal & Revlon. Those cases req, in transactions involving a change in corp control, that the dir's must satisfy the ct of the reasonableness of their actions before those actions will merit the protection of the business judgment rule.

c. Both Revlon and the fundamental duty of care req that the dir's establish that their decision was adequately informed. The need for adequate information is central to the enlightened evaluation of a transactn that a Bd must make.

d. A determination of which of 2 transactions is the better one for the shareholder reqs the dir's to exercise business judgment based on adequate information.

6. QVC v. Paramount (Del SCt 1993): The obligations of the directors included the duties (a) to be diligent & vigilant in examining critically the transactions; (b) to act in good faith; (c) to summon, & act w/due care on, all material information reasonably available, including information nec to compare the 2 offers to determine which of these, or an alternative course of action, would provide the best value available to the stockholders; & (d) to negotiated actively & in good faith with both to that end.

a. In applying enhanced scrutiny, cts will determine if the dir's decision was, on balance, w/in a range of reasonableness. In the end, the Cts must be satisfied that the course of action determined by the board, in the context of a sale of control, was reasonably calculated to secure the best value to the stockholders.

b. Since the dir's had already decided to sell control, they had a duty to continue their search for the best value available to the stockholders.