Answer to Essay 1: Choice of Entity Topics (Planning)

Owner 1 has authority to sign contracts on behalf of org, but nobody else has authority except as Owner 1
expressly agrees in writing as things arise. No owners personally liable for liabilities of the org just because of
the type of org. Prefer no ownership interest issued as a security for federal securities regulation purposes
o Best options are: LLC, LLP or CORP; but Stock in corporation is a security – best to not choose
corp as bus org form.

 (a) Liability Shield Info: Why might LLC be preferable over other type of entity form: Issue is elmo
because making promise. Problem is promise. MO LLC allow promise. MO Corp do not allow promise. In
MO LLC where okay, if want enforceable has to be signed in writing by the member making the promise
(Elmo). LLC or LLLP are best option for loose cannon because removes apparent authority of the
loose cannon and safeguards the person who doesn’t want liability for that person.
o MO LLC – no annual renewals & members do not have individual statutory tax obligations for biz.
File doc with secretary of state – 347.065
 A member or manager is not personally liable for a debt, obligation, or liability of the
company solely by reason of being or acting as a member or manager. But liability shield is
not completely protective.  347.057
 A third party may recover from an LLC member on claims that do not arise solely by
reason of being a member. – Pepsi-Cola ( LLC was not formed and had not acquired
property until after D committed the wrongful acts, thus could not have been acting
“solely as members of the LLC”).
o Partnership – unlimited personal liability for partnership obligations (personal assets at risk)
 Liability of partnership – 358.130, 358.140
 Liability of partners for the acts of co-partners is based on a principal-agent
relationship. Partners are joint and severally liable for the tortious acts of other
partners if they authorized those acts or if the wrongful acts are committed in the
ordinary course of the partnership business. – Roach v. Mead (Mead’s failure to
advise P to seek independent legal advice and that loans should be secured were
failures as a lawyer advising client. Because failures within scope of the legal
partnership, the partnership is vicariously responsible for Mead’s negligence)
 All interest is personal property
 Indemnify for ordinary course of business (payment obligation shared among
partners)
 Liability of Partners – 358.150  MO statute minority (others aren’t as liberal with imposing
liability). If participated in management and control – acted “knowingly”
 Tort obligations
 Contract obligations that are breach of trust
 & everything in 358.150(3)
o LLP has to be renewed annual – 358.150(3); and partners are still personally liable for tax
obligations, limited liability does not provide relief from MO tax obligations. If forget to renew LLP
lose shield. (okay for law firm – disclose that LLP)
 A partner in a registered LLP is not liable directly or indirectly, for any debts, obligations and
liabilities of or chargeable to the partnership or another partners, whether arising in contract,
tort or otherwise that arises in the course of the partnership business while the
partnership is registered as a limited liability partnership. – Kus v. Irving (contingent fee
arrangement where partners didn’t know or have supervision over partner who made it)
 General partners are not shielded in a registered LLP from personal liability for partnership
breaches or partner’s obligations to each other. LLP shield does not protect partners from

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 claims by other partners, thus partner creditors are better off than non-partner creditors.
Former partners are = to third P’s. – Gurksy
 MO Tax Obligations –
o Limited Partnership – Must file certificate with state secretary 359.091 (doesn’t require renewal)
 LP does not become liable for limited partnership’s liabilities even if participates in
management
 BUT MO Minority Rule 359.201- LP auto liable if participates in management of LP
 General partners still have unlimited personal liability for the partnership’s obligations
o LLLP – an LP may become LLLP by registering as LLLP 359.172 (requires renewal)
 LLP like protection to some or all of the partners.
 Limited partners no liability even if do participate in management & control
o Promotor liability – 351.053: jointly and severally liable for all liabilities created while acting as or
on behalf of corp not yet formed while knowing no incorporation.
 Novation from corp relieves promotor of rights & liabilities

 (b) Eligible Consideration for ownership: What is the acceptable consideration for an ownership interest
and how does it vary among the entities? MO LLC money, property, and services are good, and future
promises are good so long as they are signed in writing by promisee.
o LP and LLLP – promises allowed but must be in writing to be enforceable; partners obligated to
perform enforceable promises. Filing just puts LLLP behind liability shield.
o LLP – no specific section for eligible consideration. 2+ persons to join for profit, partners could
contribute anything, including a promise.
o LLC allows promise as consideration, to enforce must be in writing
o Partnership
o Corporation – No Promises! 351.160  no corp shall issue shares, bonds, or other obligations for
payment of money, except for money actually paid, labor done or property actually received. (p. 40).
All fictitious issues or increases in shares or indebtedness shall be void. Many other states allow
corporate promises for stock. 160 deals w/ company originally selling shares; existing shareholders
who bought with valid consideration can later sell for a promise.

 (c) Actual & Apparent Authority (loose cannon question): know who is agent by statute for entities and
what that means – consequences. Apparent authority exists only to the extent that it is reasonable for the
third party to believe that the agent is authorized. The third party must reasonably rely on the authority held
out by the principal, and must know of facts demonstrating the principal’s consent of the agent’s actions.
Principal intentionally caused 3rd party to believe that agent was authorized to act or should have realized his
conduct would create such a belief. Creation of apparent authority: direct or express statements; by
“position” and by “prior acts”; acquiescence of principal in prior acts of an agent.
o Partners
 Actual: Partners have actual authority in ordinary business. – National Biscuit In cases of
an even division of partners as to whether or not to act within the scope of the business and a
3rd P has knowledge of, no restriction can be placed upon the power to act. Because the
partnership is a going concern, activities within the scope of the business should not be
limited. Half of the members are not a majority.  § 358.090
 Apparent: 358.090 – Partners = agents with apparent authority when carrying on usual
biz; binding on partnership unless no authority to act in the matter & other person has
knowledge that no authority.
 Default rule is that all partners have equal rights in the management and conduct of
partnership business. But partners may agree that one or more of them shall have
exclusive control over the management of the partnership, and an agreement for
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 exclusive control by one partner may be implied from course of conduct of the parties.
Default rules may be altered by contract, but absent contrary agreement, each partner has a
cont. right to participate in management of partnership and to be informed about partnership
business, even if his assent to partnership decisions is not required. – Summers v. Dooley
o LLP– not good for loose cannon because every partner is an agent. All partners have apparent
authority even without approval from other partners. LLP authority to sign Ks would be within
ordinary business and leave other partners liable for the K. authority doesn’t change when
partnership goes to LLP.
o Limited Partners – not agents by statute – 359.201.
o LLLP – Partners – actual authority which can be restricted by owners, partners have limited liability
and not personally liable for partnership stuff; LPs have apparent authority, but remember MO
minority rule.
 Comparable to manager-managed LLC because don’t have to make every partner a general
partner. Can make limited partners.
o LLC – 347.065
 Member-managed members –agents & acts in usual biz are binding unless has no authority & other
person knows
 Manager managed: members – no member acting solely is an agent; managers – agent & acts in
usual biz binding unless acts w/o authority & other person knows.
 Good to control apparent authority because not all owners are managers.
o Corporation
 Actual
 Corporation officers have apparent authority by virtue of their position to take actions in
the ordinary course of business, but not extraordinary actions.  difficulty is deciding what’s
ordinary and what’s extraordinary – look to statutes. Also look for basis of authority in
corporation By-Laws. – Lee v. Jenkins (pension K not extraordinary)

 (d) SECURITIES: Stock in a corporation is defined as a security under 33 Act. The Howie test does not
apply to stock in a corp. For something to become a security in an unincorporated businesses it must be an
investment contract (smith v. gross case). Courts determine whether something is an investment contract
and thus, a security – by applying the Howie test.
o The Howie test has three components: courts haven’t taken it as literally as it sounds
o Doesn’t apply to stock in corp. question 1(don’t analyze all under this test) unicorp. only
 investment of something valuable (money, services, property);
 in a common enterprise (sharing of profit potential); and
 vertical commonality – investor prospects for financial gain interwoven w/
promotor’s prospects
 horizontal commonality – same investment opportunity offered to two or more
investors
 Profits solely form the efforts of others – significant efforts in terms of making profits
come from people other than the investor.
 Was security issued to silent partner? If passive investor then more likely to be buying
a security than if you’re actively participating in management of business.
 Was security issued to person with significant active participation in business?
o Entity Rebuttable Presumptions to Howey Test – whether security issued to silent partner:
 Partner’s interest in Partnership, LP, LLP, and LLLP are NOT a security – partners have
authority & power, NOT silent owners in either entity. All partners are agents with apparent
authority. All partners in LLP’s are agents 358.190, all have equal management rights, etc.)
other than liability shield, all the partners are running the show.

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  Rebutting Facts: If partners agree to vest all material decision making in a small
subset of partners, the partners outside of management group may have security
 Limited Partner’s interest in LP or LLLP IS a security –
 Nature of limited partner is thought of as silent without a say in management.
 Are there facts to rebut this presumption? What does agreement say?
 Rebutting Facts:
o If LP has right to approve a lot of management decisions and is sophisticated
enough to exercise right then maybe NOT a security
o however, 359.201 makes it okay for LP’s to negotiate power. If done so and
has power then maybe NOT a security.
 Member interest in member-managed LLC – presumption that member who is an
investing owner – thus all members in member-managed LLC are agents just like in a
partnership. Presumption starts as NOT security UNLESS assigned rights to someone else.
 Are there facts to rebut this presumption? What does agreement say?
 Does the member have rights?
 Rule on assignment?
 Non-manager member interests in a manager-managed LLC IS a security. More like
LP in LP = passive investor.
 What does operating agreement say?
 Does the member have rights?
o Securities Analysis Steps:
 Is there a security?
 Is security a primary or secondary distribution?
 Primary – company issuing stock in itself is making the offering of shares
 Secondary – someone acquired substantial block of stock in primary distribution and
is looking to resell it in an offering
 Is it registered? Must be registered unless exemption available and properly used. Without
exemption it violates requirement and investor must rescind the purchase.
 Registered? Good, its required.
 If not registered, is an exemption available?
o Private offering exemption – only available to primary offers in which
offerees able to fend for themselves: (1) meaningful access to info about
issuer and offering, and (2) sufficient sophistication to understand offering.
o Safe harbor exemptions – where facts aren’t clear but looks like a private
security so get private exemption
o Intrastate offering – offering within single state so state blue sky law applies
and Fed gov gives pass.
o Regulation D – two exemptions: availability turns on nature of the
purchasers and manner of offering
 Rule 504 exemption – under provisions of the 33 Act exemption of
offerings not exceeding $5 million
 Rule 506 exemption – safe harbor private offering exemption under §
4(2) of the 33 Act, and does not have dollar limit on the size of the
offering
 Prohibit solicitation unless accredited
 Limited crowdfunding exemption
o Security Info for MC & T/F –
 Federal securities regulation – predominantly disclosure oriented (tell investors truth about
what doing & SEC will leave it up to the investor to decide)
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  33 Act – defines security
 34 Act – insider trading, securities fraud, continuous reporting governed by proxy regulations
 Reporting companies (disclose material info about issuer)– security issuers who
become reporting companies must file annual reports, quarterly reports, and
depending on circumstances – periodic reports, specific disclosures. Buyers and
sellers trading can act on informed basis.
 How to become reporting company – (three ways)
o Registering securities on a national exchange
o Under JOBS Act
o Filing registration statement under 33 Act which becomes effective for sales
of securities in an offering
 Governs tender offers which involve offers to purchase substantial blocks of interest
that signal shift in company control

 (e) TAX CLASSIFICATION:

o Mo General Business Corp – double taxation: cannot be a partnership for federal income tax
purposes. They can be a C corp, or an S corp if meet the eligibility requirements (don’t have to list
S corp requirements)
 Taxed on income and when distribute payments to shareholders
 Do not get tax deduction for dividend payments, if shareholder is a corp it may be entitled to
shareholder received deduction
o Check the Box Regulations:
 if business has two or more owners the three tax classification possibilities are:
 Partnership – default
 S Corp
 C Corp
 If business has only one owner the three tax classification possibilities are:
 S corp
 C Corp
 Disregarded entity – default
 If state law LLC or LLP that is a “domestic eligible entity” – AKA unincorporated
business formed under U.S. law for federal tax purposes, but might be:
 Partnership – default if 2 or more owners
 Disregarded entity – default if one owner
 S corp – elective option by filing w/ IRS  defaults to C corp if later fails to maintain
eligibility requirement
 C Corp – elective option by filing w/ IRS
o S Corp (pass through) & additional benefit  Salary and Dividend Payments. can opt to
receive both a salary and dividend payments from corp. can result in an overall lower tax bill. Why?
Because dividends are not subject to self-employment tax.
 corporation can deduct the cost of the wages paid when computing the amount of income that
is passed through to the shareholders.
 However, division between salary & dividends must be “reasonable” by the IRS.
o Relevant factors for determining appropriate classification:
 Contributions of property, other than cash in exchange for ownership interest
 Contributions of services in exchange for ownership interests
 Profits & losses generated by business
 Distributions to owners
 Entity liability on owner tax results
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  Amount of social security and medicare taxes to be paid on an owner’s earnings related

 (f) THREE Reqs to be eligible for S CORP TAX Class:

o No more than 100 shareholders – apply facts
o Shareholders with some exceptions have to be human beings and not non-resident aliens –
apply facts, explain how met, what to make sure of etc.
 If going forward and might want to have entities invest in the corp then don’t do S corp
because investors have to be people not business entity shareholders. Reduces ways to raise
money.  LLC can have entities as managers
o One class of stock in terms of distribution rights (can have two classes of voting rights) – how
does this requirement implicate the facts?  preferential distributions before other general
distributions are paid = two classes of distribution rights. If want to do this then can’t make S corp
election. (limits planning creativity)

 Sharing Profits & Losses, Distributions:

o LLC – general rule: follow operating agreement; The default rule for making distributions to
members of a Missouri member-managed limited liability company is to first repay their capital
contributions (in proportion to amount of cash or value of other contributions made by each), and
after all such capital contributions have been repaid, then further distributions are apportioned
among them equally.
o Partnership – default rule: share losses & profits equally. Kessler v. Antinora – parties had
implicitly agreed by conduct to share profits and that their contributions of money and sweat equity
have been valued in equal ratio. Thus both lost some money and labor and loss fell on both
proportionately because did not contract otherwise.
o In both LLC and partnership  include rule for sharing profits if contribute more capital than
others to avoid default rule of sharing equally.
 Other business planning considerations:
o What type of state law bus org do I want to be?
o What state do I want to form it in? where to file? What facts needed to determine what’s best for
business?
o What tax status – what is desired result? Does that desire preclude from forming certain type of bus?
o In LLC managers of manager-managed LLC can be another company. Corp requires directors to be
real individuals.
o Statutory close corp – actually filed something declaring 351.750 & 351.755 must use magic words

Answer to Essay 2: Fiduciary Duty Litigation: 30 points

Representing potential minority shareholder in a MO corp, no control and mad at directors & officers because
they did something the client thinks is lousy.
 PROCEDURE – 5 points:
o Whether direct or derivative action:
 Direct Action– shareholder seeking to enforce shareholder claim based on ownership of
shares.
 Duty of loyalty – compel dividends, access to corporate records
 Trying to stop oppressive actions toward minority shareholders
 Class actions for securities fraud
 Derivative Action – company directly harmed, causing P’s harm – mechanism provided to
avoid conflicts of interest by forcing corp to bring suit against directors when directors aren’t
doing so for inappropriate reasons

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  When did P become owner of their interest? Is contemporaneous ownership rule
satisfied? Plaintiff was shareholder or member at the time of the transaction
complaining about OR acquired interest by operation of law in chain relating back to
ownership at time of.  prevents harassment
 Did P make efforts for directors, other authority, or if necessary shareholders to
make the claim themselves? Why did these efforts not work? If did not make these
efforts – why?
 Does the P fairly represent the interests of others’ similarly situated in enforcing
right of the corporation?
 If business has a compensation board or litigation committee – did P demand them
to bring the suit?
 Is demand excused as futile? show wrongdoer was so many directors that board was
biased and never going to sue themselves. Argue bias!
o Was committee independent and free from conflict of interest?
o Does their decision meet business judgment rule?
 If demand required and demand was made – P gets review of decision w/ specific
facts showing board decision was not protected by business judgment rule.  P use
“tools at hand”

 SUBSTANCE of EACH CLAIM

o Identify & label:
 Which duty breached – duty of loyalty and duty of care claims – may have both happening
at the same time, but identify which is which.
 What type of claim under that duty?
 duty of loyalty – self-dealing, derivative action
 duty of loyalty – corporate opportunity, derivative
 duty of care – did something stupid w/o bad faith
o fraud, illegality, conflict of interest, waste, gross negligence
o plain duty of care claim – exculpation clause?
 What other facts need to know in order to make conclusion? why certain facts are relevant?
how does the law make those factual questions significant?
o Business Judgment Rule – prevents court from 2nd guessing decisions made by disinterested and
independent directors who have acted with due care by focusing on reasonableness of board’s
decision-making process. Default rule which insulates director’s decision when:
 In good faith
 Not interested
 Informed on subject to extent reasonable believe appropriate
 Rationally believes decision is best interest of business
o Internal Affairs Doctrine: In Schlensky v. Wrigley, D’s conduct must border fraud, conflict or
illegality before the court should interfere in internal affairs of business. Heightened scrutiny when
bad faith, self-dealing or egregiousness is shown.  was not shown in this case
 Bad faith test for compelled dividends
 Intrinsic fairness for self-dealing
 Waste test for egregiousness

 DUTY OF LOYALTY GENERAL RULES:

o 358.210 – partner duty of loyalty when does self-dealing or partnership opportunity w/o other
partners.  Meinhard v. Salmon (hotel venture)

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 o LLP & LLC – okay to have partner or member or manager to transaction outside of the
business, but may privately put in disclosure, votes, etc. might also add corporate opp. Provision
but in partnership or LLC capacity. May put same stuff from ALI test in there.
o In a close-held corp the shareholders duties equivalent to partners - because of the
fundamental resemblance of the close corp to the partnership, the trust and confidence which are
essential to this scale and manner of enterprise, and the inherent danger to minority interests in
the close corp, hold that stockholders in the close corp own each other substantially the same
fiduciary duty in the operation of the enterprise that partners owe each other – utmost good faith
and loyalty (strict good faith standard)
 Inherent fairness & equal opportunity in stock purchases – when minority denied equal
opportunity they are entitled to relief.
 Majority must act with good faith & loyalty – not self-dealing such as withholding
dividends to freeze-out  not g/f

 DUTY OF LOYALTY CLAIMS:

o COMPELLED DIVIDENDS w/ Social Entity Tension – Direct Action bc shareholder’s
dividends. To win a compelled dividends case P must show facts satisfying two element standard
of proof: (1) Was there a surplus of money? And (2) not paying dividends to shareholders in bad
faith—no adequate business purpose to not pay dividends
 Bad Faith Test – whether the policy is dictated by their personal interests rather than
corporate welfare. Is there a question of bad faith because someone pursuing their own
personal agenda?
 Must allege directors had self-interest in the transaction either form a personal
financial interest or from a motive for entrenchment in office.
 Show evidence that special committee dominated by corp exec or otherwise face
presumption that the acts of the directors are valid under business judgment rule.
 What facts show withheld dividends in bad faith?  social entity facts
o Is corp undertaking the issue to reduce hazards to environment or for purpose
of making town attractive to employees and thus lowering labor costs?
o Doing bidding of shareholders where they still benefit from higher dividends?
o Is refusal to declare and pay further dividends arbitrary refusal to do what the
circumstances required to be done?
o How does corp justify their actions?
 Missouri Constituency Statute 351.347 fact that might have thought about charitable
purposes not necessarily bad. “Can think of social effects of business decisions outside of the
merger context.” But not powerful to lean on in case of Waste or not maximizing wealth.
 Property theory v. Social Entity Theory
 Shareholder primacy & wealth maximization – bus purpose is to make shareholders
money.
 Right to promote what regard as desirable moral objectives only with own money
 Long term strategy to maximize profits, or too much personal opinion trumping
primary duty to make profits?
 351.385(15)  Okay to make charitable contributions but caselaw says must be
reasonable
 Dodge v. Ford Motor Co. reflects a pure example of the property concept. Court held that
fact that P’s have participated in the general expansion policy do not and cannot estop P’s
from demanding proper dividends upon the stock they own. A director can think of other
factors when making business decisions but the primary duty is to pay the shareholders.

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  Facts: Ford thought company made too much although profits might still be earned
he would rather share with the public by reducing price of cars – charitable idea, but
not the purpose of the business. Had plan to maintain the price of the cars and to
accumulate a large surplus to pay for proposed expansion, equipment and another
plant.
 Holding: a business is organized and carried on with the primary purpose for the
profit of the shareholders. The powers of the directors are to be employed to that end.
The discretion of directors is to be exercised in the choice of means to attain that end,
and does not extend to a change of that end, reduction in profits, or to non-
distribution of profits. This discretion is to be exercised in good faith.
 If P’s company veered from Ford standard then might be duty of loyalty breach**
 EXCEPTION: Freeze-out of minority shareholders by the party or parties in control of a
corp  often a duty of loyalty breach, actionable by the minority shareholders

o SELF – DEALING: Where a director for the company is benefiting from part of the transaction,
even if didn’t make a big profit still self-dealing issue just for doing it.
 Intrinsic fairness standard the burden of proof is on the directors to show, subject to close
scrutiny, that the transaction was objectively fair to defendant. Look at motives of defendant
and effect of the transaction on the corp and shareholders as well as defendant relationship to
the transaction to determine fairness. Relationship to the transaction alone is not a controlling
factor – need undisputed evidence tending to show transaction would advance personal
interest of directors at expense of stockholders.
 Applies to self-dealing UNLESS:
 approval by fully informed disinterested directors (a)(1), or approval by disinterested
stockholders (a)(2),  business judgment rule and limits judicial review to gift or
waste with the burden on attacking party to overcome business judgment rule.
Then P would say argument not based on self-dealing anymore but based on waste.
 Except where parent company has received a benefit “to the exclusion and at the
expense of the subsidiary” then intrinsic fairness still applies. Sinclair Oil
 Provision in agreement allowing & encouraging self-dealing allowed and
enforceable in Singer v. Singer.
 Transaction between Corp and Director NOT VOID but cleansed if: 351.327 (handout)
 Disclose material facts of the transaction and the director’s relationship to it to the
board or committee, and they authorize transaction in good faith by affirmative
majority of disinterested directors; or
 Material facts of director’s relationship to transaction are disclosed or known to
stockholders entitled to vote, and the transaction is specifically approved by good
faith vote  Heller v. Boylan
 Transaction is fair to corporation at time authorized by the board or stockholders.
o Delaware statute NOT a sole basis for avoiding voidability. Statute merely
removes interested director cloud when terms are met and provides
invalidation of agreement solely because director is involved. Two tiered
analysis: application of statute and intrinsic fairness test – then likely void if
fails both.
 Intrinsic fairness test mandated where deadlock prevents ratification
but also where shareholder control by interested directors precludes
independent review. If no independent board available in 144(a)(1),
sole forum for fairness is judicial. Marciano – unable to get approval
by disinterested directors under (1), unable to get shareholder approval

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 under (2), and unable to get ratified under (3). In this case if there had
been approval under (3), then could have defended transaction by
showing it was “fair”
 On the other hand – approval by fully informed disinterested board
permits business judgment rule and limits review. Fliegler – even if
defendant’s satisfy clauses (1) or (2) still subject to intrinsic fairness
attack because satisfying the clause only saved it from automatically
invalidation.
o But MO statute that may not be allowed because of 351.327(4) intent of
section is to set forth methods a conflicted transaction may be regularized
to become arms-length transaction – could be read to mean that’s the
whole story…
 that plaintiff trying to attack self-dealing transaction could not argue
lack of intrinsic fairness if (1) or (2) is satisfied because statute doesn’t
mention fairness
 that defendant could not argue intrinsic fairness unless got into (3)
with an approval or ratification
 could still convince court in a deadlock situation that MO law could
allow intrinsic fairness analysis in compelling situations not calling for
a literal reading.  shareholder deadlock prevents ratification
 Entire fairness is highest standard in controller merger context as a substitute for dual
statutory protections of disinterested board and stockholder approval because both
protections are undermined by the influence of the controller. where a transaction
involving self-dealing controlling a stockholder is challenged, the applicable standard of
judicial review is entire fairness D burden of proving transaction was entirely fair to minority
shareholders.
 Fair dealing – timing, how initiated, structured, negotiated, disclosed to directors, and
how the approval obtained.
 Fair price factors:
o Assets
o Market value
o Earnings
o Future prospects
o Any other elements that affect the intrinsic or inherent value of a company’s
stock
 Where the controller irrevocably and publicly disables itself from using its
control to dictate the outcome of shareholder vote it acquires the shareholder-
protective characteristics of third-party, arm’s-length mergers, which are reviewed
under business judgment standards and the claims against Ds must be dismissed
unless no rational person could have believed that the merger was favorable to
minority stockholders.

o CORP OPPORTUNITY – Derivative Action – corp not a part of transaction, corp was by-passed
by director, but corp should have had first shot at the transaction.
 Was there a Corporate Opportunity? Any opportunity to engage in a business which a
director becomes aware of either: In connection with functions as a director, or under
circumstances that should reasonably lead director to believe that the person offering the
opportunity expects it to be offered to the corporation; or (2) Through the use of corporate
info or property, if the resulting opportunity is one the director should reasonably be
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 expected to believe would be of interest to the corporation.  same line of business as the
corp?
 Old Approach: Cases like Northeast Harbor Golf Club v. Harris historically used the line
of business test & overall fairness test. disclosure oriented approach provides procedure
where a corporate officer may insulate themselves from legal issues via prompt and complete
disclosure. recognizes duty of loyalty, but protects fiduciary’s ability to pursue own business
ventures.
 Harris was president of the golf club. The corp thought about building houses around
the golf course, but decided not to and liked their country club without. Sellers of the
property approached Harris about the property up for sale, thinking of the country
club as the logical buyer. Harris went ahead and bought the property in pieces for
herself and not for the country club
 ALI test – Modern Approach designed to eliminate the inequities and uncertainties caused
by existing vague rules. defines corporate opportunity to include opportunities closely
related to a business in which the corporation is engaged.
 Corporation must show: The opportunity is a corporate opportunity, that the
defendant did not offer the opportunity to the corporation or that the corporation did
not reject it properly.
o If corp shows the board did not reject the opportunity by a vote of the
disinterested directors after full disclosure, then the defendant may defend
their actions on the basis that the taking was fair to the corporation.
o But if the D fails to offer the opportunity at all, then they may not defend on
the basis that the failure to offer opportunity was fair.
 How did the wrongdoer find out about the corporate opportunity?
o Were they approached in their capacity as director?
o Did they know through company files?
o Should they have known the opportunity was in corp line of business?
 If it was a corporate opportunity – was it “cleansed”?
o Disclosure: Director first offers opportunity to the corp and makes disclosure
concerning the conflict of interest and the corporate opportunity.
 Ratifying defective disclosure: good faith defective disclosure of
facts concerning corporate opportunity may be cured if at any time
(but within reasonable time after suit is filed) the original rejection of
the opportunity is ratified, following the required disclosure by the
corporate decision-maker who initially approved the rejection.
o Corporate opportunity is rejected; AND, either:
 Rejection of the opportunity is fair to the corp;
 Opportunity is rejected in advance following the disclosure by
disinterested directors, or by a disinterested superior in a manner that
satisfies the standards of the business judgment rule; or
 Rejection is authorized in advance or ratified, following such
disclosure, by disinterested shareholders and the rejection is not
equivalent to a waste of corporate assets

 DUTY OF CARE – “Board makes stupid hiring decision for long-term contract” type facts. Duty of care is
not bad faith, but did something stupid. : whether there was good faith effort to be informed and exercise
judgment. What questions need to be ask?
o Corporate law standard of care – two tests: (applied to decision making process not the result)
 Due care used in ascertaining relevant facts before making decision
11
  Decision must be made after reasonable deliberation
o Rule out duty of loyalty: Are there facts that show the person hired under the contract is a relative
to a director? Or a conflict of interest not in the facts?  if none of these facts then not a duty of
loyalty.
o Defendants will raise business judgment rule: a presumption that in making a business decision
the directors of a corp acted on an informed basis, in good faith and in an honest belief that the
action taken was in the best interests of the company. Court generally reluctant to think they can
make better decision than the business people who know the company.
 What does D have to show to raise the business judgment rule defense?
 Exercised a good faith effort to be informed and to exercise appropriate judgment,
they are deemed to satisfy the duty of attention. (shareholders elect their directors –
pick someone suited for the job!)
 director acted with due care in the process sense, not be liable even though the
decision itself was not that of the ordinarily prudent person.
 director took appropriate steps to become informed.

o What facts, if present, could OVERCOME Business Judgment Rule?

 Must be fraud or misappropriation of funds or breach of good faith to justify entering
internal affairs of corporations.
 Illegality – Caremark
 Conflict of interest.
 § 351.327.3 – Financial interest of corporate officers  Unless otherwise provided in
the articles of incorporation or the bylaws, the setting of the compensation of
directors for services in any capacity by the board of directors pursuant to § 351.310
shall not be deemed to involve a conflict of interest.
 Sullivan v. Hammer: P lost and business judgment rule prevailed because did not
allege facts showing directors had any self-interest in the transaction either from a
personal financial interest or from a motive for entrenchment in office, nor any
evidence the special committee was dominated by founder and chairman, Hammer.
Therefore court must review the P’s claims against a presumption that the acts of the
directors are valid.
 To the contrary, In Re El Paso the court did not grant an injunction to stop the
transaction even though a lot of conflict because possibility that P’s would get fair
price for stock, court would still rather let the transaction go forward and P’s can
decide whether to take the money or not and preserve their shares. P to show that
more faithful, unconflicted parties could have secured a better price (alternative
option less harmful to minority?).

 WASTE – did homework and made decision despite knowledge –lack of minimum
rationality. Tough to prove. P’s must show exchange so one-sided no business person of
ordinary, sound judgment could conclude that the corp received adequate consideration. A
claim of waste will arise only in rare “unconscionable case where directors irrationally
squander or give away assets.
 Standard  Egregiousness – 100/100 would have thought the decision was bad.
Even though haven’t proven bad faith with intent, the decision is so crazy can imply
something bad was going on. So irrational suggests bad faith or personal interest*
o Disney: board reliance on director’s decision not to fully calculate severance
package lacked “egregiousness” thus court did not second guess board’s
business judgment. Duty of care is still fulfilled even if a board does not
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 know exact amount of severance payout but was fully informed how
payout would be calculated. Board not required to be informed of every fact,
but rather be reasonably informed.
 Waste test: so disproportionately small NO reasonable person would be willing
to trade. BUT if any substantial consideration received, and good faith judgment that
in the circumstances the transaction is worthwhile – not waste, even if fact finder
would conclude transaction was unreasonably risky. Disney: Complaint failed the
waste test because didn’t show reasonable business person would NOT have made the
decision the board did under the circumstances.
 Relevant questions:
o Is there a raincoat provision?
o What do other people get paid for these services?
o How do other companies entering Ks like this handle it?
o Was the waste against shareholders protest?  Heller: derivative action to
recover for the corp improper payments made to certain directors. P still lost
because payments not made against protest of minority because
shareholders ratified the compensation plan.

 GROSS NEGLIGENCE – AKA – pure duty of care claim: weren’t reasonably informed
to constitute gross negligence (lousy homework).
 Did they hire a consultant to help them with this agreement? In Disney hired
consultant’s analysis was botched, but board was still protected because hired one.
 Did they crunch numbers to figure out cost?
 Did they look at background of that person to see how they might treat this company?
 What kind of homework did they do?
 Is there an exculpation clause (raincoat provision) in articles? Agreement waiving
right to sue directors based on a duty of care claim for monetary damages (wont
second guess how much homework the director did AKA suit for making a bad or ill
informed decision)  but still possible to get an injunction to stop the director from
following through with the decision.
o If such provision – was it valid? make duty of loyalty argument as well
because raincoat provision doesn’t extend to that**
 Exclusions: duty of loyalty, acts or omissions not in good faith
(intentional misconduct of knowing violation of law), self-dealing,
compelled dividends.
 Partnership can waive both*
 OPT IN in MO
o Any evidence of ill motive? Even if ill motive, assume how it plays out
without ill motive.
 Apply business judgment rule – whether directors informed themselves as to all
information that was reasonably available to them. Directors are entitled to rely on
chairman’s opinion of value and adequacy, provided reached on sound basis.
Considerations of good faith are irrelevant in determining the threshold issue of
whether the directors exercised an informed business judgment.
o Smith v. Van Gorkom – informed decision-making: the board was grossly
negligent in that it failed to act with informed reasonable deliberation in
agreeing to the merger proposal. The board’s decision to approve the proposed
cash-out merger was not the product of an informed business judgment.
Had they informed themselves all of info available they would have learned of
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 the source and deprivation of the price and could not have reasonably relied
upon it in good faith.
 Overcoming business judgment for GROSS NEGLIGENCE: deficiencies in
monitoring complex business processes, to overcome biz judgment, P must prove:
o Directors utterly failed to implement reporting system– lack of good faith as
evidenced by systematic failure of a director to exercise reasonable oversight,
OR
o Implement such a system or controls, but consciously fail to monitor or
oversee its operation, thus disabling themselves from being informed of risks
or problems requiring attention

 Other Breach of Fiduciary Duty Claims:

o Excess dividends & lack of expansion claims: Self-dealing if not proportionate – where minority
shareholders treated inferior to parent shareholders? If parent seized corp opportunity through
subsidiary when they breached duty of loyalty
o Ursurping company assets for self-benefit = breach of duty of loyalty unless show was for benefit of
the company
o Disclosure obligations
o When a recipient’s vote as a director was necessary to the fixing of the amount of their own
compensation, the burden of showing the reasonableness of such compensation falls on the recipient-
director. (closely held corp: 2 shareholders married, then divorced  Wilder). Relevant factors:
 Whether or not IRS has allowed the corp to deduct the amount of salary alleged to be
unreasonable
 Whether the salary bears a reasonable relation to the success of the corp
 Amount previously received as salary
 Whether increases in salary are geared to increases in the value of services rendered
 Amount of the challenged salary compared to other salaries paid by the employer

Veil Piercing Outline (exclusive to closely-held & one person corps)

 Few cases where corporate veil is pierced. Even in parent-subsidiary context, courts take view that a parent
corp possesses a separate existence and is treated separately from a subsidiary unless there are circumstances
clearly involving fraud, manifest unfairness, or misconduct. Over-utilization of courts equitable power to
pierce the corporate veil would make the corporate form useless.
 When courts will do it?
o Fraud
o Torts – Collet Test
 Complete control – not only of finance, but corp entity as to the transaction had no
separate mind, will or existence of its own
 Control used by D to commit fraud, wrong, perpetuate violation of statute or other legal
duty, unjust act in contravention of P rights
 Financially responsible? Insurance meets financial responsibility test.
 Creation of an undercapitalized subsidiary justifies an inference that parent is
either deliberately or recklessly creating a business that will not be able to pay its
bills or satisfy judgments against it.
 Control and breach of duty proximately caused injury or injust loss

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 o When continued recognition of corp as a separate entity would produce injustices and
inequitable consequences  test for tort
 (Baatz was K obligation – personal guarantee bc company financial shakey cannot be
enlarged to tort. Personal guarantee creates individual liability for a corporate obligation,
the opposite of factor 5 – found no relationship between corp defects and resulting harm)
 Fraudulent misrepresentation of corporation directors
 Undercapitalization – financially responsible?
 Failure to observe corporate formalities, but mere failure to follow all the forms
prescribed by law will not justify piercing
 Absence of corporate records
 Payment by the corp of individual obligations
 Use of corp to promote fraud, injustice or illegalities
o Alter-Ego Theory (Contract obligation) When sole beneficiary who also dominates corp
induces a creditor to extend credit to the corporation on assurance that would take
personal liability if corp failed to pay is sufficient basis for piercing the corporate veil. 
(plaintiff continued hauling fruit based on the assurance) Dewitt
 Courts apply this theory when substantial ownership is combined with other factors
clearly supporting disregard of the corporate fiction on grounds of fundamental
inequity and fairness. Courts are concerned with reality and not form, with how the
corporation operated and the defendant’s relationship to that operation.
 failure to observe corporate formalities – Absence is evidence that the corp was
operated on purely personal matters
 non-payment of dividends - persuasive proof of want of capital, operating at all
times on someone else’s capital.
 insolvency of the debtor corporation at the time
 siphoning funds of the corp by the dominant stockholder
 non-functioning of other officers or directors
 absence of corporate records
 fact that the corporation is merely a façade for the operations of the dominant
stockholder or holders.
 Piercing Veil in LLC’s – Legal entity will be disregarded whenever the recognition of the entity in a
particular case will lead to injustice. If members and managers of LLC fail to treat it as a separate entity as
contemplated by the statute, they should not enjoy immunity from individual liability for the LLCs acts that
cause damage to third parties. (Leiberman – Wyo. Law)
o Factors for piercing the veil in LLC (but an injustice of unfairness must always be proven)
 Fraud
 Inadequate capitalization – not sufficient alone. Basic business practice and policy call
for financial responsibility and require it attempt to arrange for enough capital to
reasonably cover its potential liabilities at various points of existence.
 Determining if undercapitalized: Compare the amount of capital to the amount of
business to be conduct and the obligations which must be satisfied.
 If LLC is undercapitalized or if members have never attempted to make
arrangements to secure sufficient capital – may be evidence that company was
used to screen members from legitimate debt because it is not in reality an
autonomous company capable of carrying on its own business.
 Degree to which business and finances of the company and the member are intermingled.
Factors suggestive of improper use of LLC:
 Funds and assets should be separate and not commingled

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  Failure to maintain arms-length relationship between member and company
 Not keeping separate bank accounts and book keeping records
 If member treats LLC property as personal property
o Factors not applied to LLC that are to corporations for veil piercing:
 Failure to hold member or manager meetings– not factors tending to establish personal
liability for LLC acts,
 Failure to observe formalities – not appropriate because informality of organization and
operation is common and desired.
 Veil Piercing Vocab
o Interlocking management – is the parent company really dominating how the subsidiary is
operated? Substantial overlap is a factor. Parent-subsidiary veil piercing, same human beings
managing both. Good for plaintiff bad for defendant factor.
o Equitable subordination AKA Money Food Chain – owners at the end. May see future inability
to pay debts and try to elevate themselves so they aren’t behind third-party creditors on getting
paid, then claim company owes for debt outside of shareholder interest. Even if do have
legitimate claim for back wages, still at the bottom as shareholder (based on idea of taking
advantage of insider information to put self in better situation).
o Successor Liability – Just because bought assets doesn’t make you liable for the things that the
prior company did. Unless one of the below things are true.
 Agreement to disclosure on prior claims. Factored into purchase price.
 If agreement, does it demonstrate more facts that show actually took over the company
and not just the assets? (merged)
 liquidate company trying to get rid of some of the creditors (if creditors don’t show up
and make a claim and then time barred) then re-incorporate with the same people. Courts
will say no, new corp inherits liabilities of the liquidated company.
 Fraudulent transaction
 Reverse Veil Piercing – shareholder’s assets should be treated as the corporation’s assets. Homestead
exception to reverse veil piercing  a creditor of a corp can reach assets of shareholder that were
contributed to corp EXCEPT homestead.

Missouri Corporations
Formation
 President & secretary REQUIRED by statute – 351.360
 Defective incorporation – 351.075  secretary filing cert of incorp is evidence one existed. MO requires
KNOWING there was no incorporation for promotor liability to attach. If good faith belief corp was
formed then not liable under MO law. Robertson v. Levy – levy still liable regardless of knowledge.

Preemptive Rights Unless OPT OUT (basic nature – antidilution)

 351.305  default rule. Preemptive rights gives investor right to maintain percentage of ownership by
buying a proportionate number of shares of any future issue of security prior to shares being made available
for purchase by public.
 Essentially to buy future shares at same price – corps don’t usually want to do this though because have to
go around and see who all wants to buy in advance.
 Opt out in articles by stating – only have right to buy your shares unless articles said could buy bigger
price.

Deadlocks

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 Discontinuing Corporations – 351.467: Procedure Filing for Discontinuation of Corporations  no fault
business divorce
 Provisional director – 351.323: appointed by court to break corporate deadlocks. Shareholders or directors
are considered deadlocked within the meaning of 351.494 and any and all provisions of this chapter,
notwithstanding appointment of a provisional director to this section, if such shareholders or directors would
be deadlocked BUT FOR the appointment of the provisional director.

Voting & Elections

 2/3 for substantially all corp assets (mergers & dissolutions)
 Simple majority for amendments to articles
 Electing and removing directors: 351.315 –
o 1+ individuals with number specified in accordance with the articles or bylaws.
o May elect for 1+ years, not to exceed 3 years.
o Removal meeting shall be held at PPB in state incorporated unless provided otherwise
o Unless provided otherwise one or more or the entire board can be removed with or without cause
by vote of majority shareholders entitled to vote at an election.
 351.225 – shareholders’ meetings prescribed by bylaws
o Meetings held as provided by the bylaws, if have provision state doesn’t matter. In absence of
provision – meetings shall be held at the registered office of the corporation in Missouri.
o Annual meeting shall be a fixed day in the bylaws; if no day provided, then second Monday in
the month of January. Failure to have a meeting doesn’t constitute forfeiture or dissolution.
o Special meetings may be called by the board or by persons authorized to do so in the articles of
incorp or bylaws.
 351.230 – Shareholders’ meetings – notice
o Written notice to each shareholder entitled to vote: where, when and meeting called no less than
10 days and no more than 70 before meeting
o Mailbox rule
 Cumulative voting = OPT OUT, otherwise its applicable – number of votes that each shareholder is
permitted is first computed. A shareholder has a number of votes equal to the number of shares he owns
multiplied by the number of board seats up for election. Shareholder then permitted to distribute votes as
see fit. MO HAS BUT IS OPT OUT. Formula on pg. 312 in textbook also handout has it
o Positive arguments for cumulative voting – p. 311 footnote b.
 Democratic in that persons with large holdings (but minority) should have a voice in the
conduct of the corp
 Desirable to have variety of viewpoints represented on the board
 Presence of minority director may discourage conflicts of interest by management since
discovery of such conflicts is considerably more likely
o Arguments against cumulative voting:
 Introduction of partisan director is inconsistent with notion that the board shoul represent
all interest in the corp
 Partisan director may cause disharmony which reduces efficiency
 may criticize management unreasonably so as to make it less willing to take risky (but
desirable action
 a partisan director may leak confidential info
 further narrows partisan goals, particularly to give insurgent group a toehold in the corp in
an effort to obtain control.
 Proxies – having someone vote on your behalf

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 o 351.245 – shares, how voted & control share acquisition proxies. Allows Proxy Vote, but expires
in 11 months. Irrevocable: state that it is irrevocable in writing, and coupled with an interest
sufficient in law to support an irrevocable power of attorney; need not be an interest in the shares
themselves, but it may be such an interest or an interest in the corp generally.
o Proxy regulation for 34 Act reporting companies
o Proxy appointments: Where the record owner and beneficial owner are different people, it is
clear that the beneficial owner can compel the record owner to execute a proxy appointment in
the name of the beneficial owner so that the beneficial owner may vote the shares as they desire.
Beneficial owner can also compel record owner to turn over any distributions made by the corp
and ultimately to re-register the shares in the name of the beneficial owner when requested
 Record owner is the person whose name is on the shares – record holder may not be the
actual owner of the shares. If the record owner is a different person from the beneficial
owner, the corporation must determine who has been authorized by the record owner to
vote the shares.
 beneficial owner – the actual owner. The corporation may treat the record owner as the
owner of the shares for purposes of voting, payment of dividends or distributions, and
determining to whom shares are transferred.
 Salgo v. Matthews -
o Record Date: Until record shows transfer of shares, the owner on record still gets the votes. If
corp behind on paperwork, the new owner might not get to vote. Until paperwork catches up, the
buyer can get a proxy from the seller in such situation. Should also want it to be an irrevocable
proxy so beneficial owner has that voting right while waiting for their ownership to be reflected
on the record.
 Voting Trust – Criteria:
o Rights of the stock are separated from the other attributes of ownership
o Rights granted are intended to be irrevocable for a definite period of time
o Purpose of the grant is to acquire voting control of the corporation
o 351.246 – Shareholders MAY create voting trust. Any number of shareholders of a corp may
create a voting trust for the purpose of conferring upon a trustee(s) the right to vote or represent
their shares, for any period
o Brown v. McLanahan: Voting trustees have fiduciary duties to the shareholders, and stripping
shareholders of their rights breaches that duty. Power to vote stock is equitable. (the agreement
was not intended to vest the trustees with power either to impair the voting power or to use the
power for the benefit of the debenture holders and to the detriment of the holders the trust was
holding in lieu of).
o Lehrman v. Cohen: Class AD stock not controlled by voting trust because did not divest and
separate the voting rights from the other attributes of ownership of the AC and AL stock.
Statute permits stock creation with voting rights only. Each class stockholder retained complete
control over their voting. AD arrangement had a proper use as protecting the corp from deadlock.
 Shareholder Voting on Certain Fundamental Actions
o 351.090 – amending articles  majority. If cumulative voting and trying to make directors less
than 3  need special approval by people who would be hurt by the amendment. Minority could
block the amendment
o 351.093 – when certain shareholders must be permitted to vote
o 351.400 – disposition of assets  2/3 vote
o 351.425 – voting by shareholders on plan for merger or consolidation  2/3 vote
 Dissenter appraisal rights are provided to MO Corps
o 351.464 – dissolution by board of directors and shareholders  2/3 vote

18
 o 351.466 – dissolution by consent of all shareholders
 Pooling agreement - Shareholders agreeing among themselves how they will cast the votes. Not separating
their right and giving it to someone else. Concerted action among the group of shareholders. They may
lawfully contract with each other to vote in the future in such a way as they determine.
o Ringling Bros – wives agreed to consult and confer with each other in exercising their voting
rights and to act jointly. So long as the parties agree for whom or for what their shares shall be
voted, the agreement provides no function for the arbitrator. This provision designed to operate
in aid of primary purpose to act jointly in exercising their votes and for means of fixing a course
of action whenever they themselves might reach a stalemate. Husband wasn’t able to cast votes
for wife regardless of fact that agreement not explicit on having someone else vote for them.
Breach of contract if either of the women didn’t pool their votes together.

Power to Issue Shares – § 351.180:

 (Be familiar with paragraph (1))  find either articles of incorporation sets out the rules for issuance, or
something in articles to delegate ability to issue to directors– in a resolution/declaration of what rights are.
 Answers: What are investors looking for?  351.180 allows to play with these things***
o Return of – get back what you invested
o Return on – equate with earnings and profits ON investments
o Voting rights (determined via agreement)
 Concept of Par Value is optional in Missouri per 351.180. Par value is an arbitrary amount representing
minimal amount for sale. If Missouri corp has shares with Par Value they shall not be issued for less than
fixed par value by board of directors (Default rule per 351.185).
o If shares consist wholly of shares with par value, stated capital represented by such shares shall
be the aggregate of the par value of the shares so issued – but can issue for more.
o Par value structure protects creditors of corp who rely on company’s capital in extending credit
and may protect other investors who have invested real assets from diluting those interests
 Types of Equity Securities  351.180
o Shares Generally – units which interest of the corporation are divided. May issue different
classes of shares with different preferences, limitations, and relative rights. Each must have a
distinguishing designation and all shares within a single class must have identical rights.
 Fundamental rights of holders of common shares: Entitled to vote for the election of
directors and on matters coming before the shareholders; Entitled to the net assets of the
corp upon dissolution. Holders of common shares have a non-financial right as well –
right to inspect books and records, a right to sue on behalf of the corp, and a right to
financial information. Represent residual ownership interest in corp; financial interest
open-ended as they benefit as the company prospers and corp assets increase
 Common Share Characteristics:
 Right to receive dividends contingent upon apportionment of profits
 Negotiability
 Ability to be pledged or hypothecated
 Conferring voting rights in proportion by the number of shares owned
 Capacity to increase in value
o Preferred Shares – rights are preferential to common shares, but limited in some way.
Distinction arises when a corp has more than one class
 Usually non-voting, but is assigned if the company misses a dividend payment or if it
fails to meet some other financial test.
 Entitled to preference payment of common shareholders. scope of rights are
established in detailed provisions of the articles of incorporation, which creates the

19
 classes of shares. These provisions may not be amended without the consent of holders. If
earnings of corp are retained by the corp and not distributed, the value of common shares
will increase but the value of preferred shares may not.
 Special Contract Rights Publicly Traded Preferred Shares
 Cumulative dividend rights – if preferred dividend not paid in any year, it
accumulates and must be paid before any dividend may be paid on the common
shares in a later year.
 Voting – usually non-voting, customary to provide voting right if preferred
dividends have been omitted. But limited to certain things (351.180.1)
 Liquidation preferences – fixed at specified price per share, payable upon the
dissolution before anything paid to common shares. Not a debt but claim to
priority if and when funds are available. Fixed so holders do not share in general
appreciation in the value of corp assets.
 Redemption rights – corp has power to buy back redeemable shares at any time
at fixed price, and shareholders has no choice but to accept that price. May be
made redeemable at option of corp in articles of corp at time the class of preferred
stock created.
o When corp exercises redemption privilege it “calls” the stock for
redemption. Usually can be exercised only after certain period of time
and price is usually set somewhat in excess of the amount of the shares
liquidation preference.
o 351.180.2: put right (holders can say I’m electing my option you buy my
stock back to corp) or the call action (holders have to sell it back to corp);
catch is – provided at time of redemption has to be entire class with voting
rights.
 Conversion rights – may be convertible at the option of the holder into common
shares at fixed ration specified in articles of incorp. Convertible preferred shares
attractive when common shares are publicly traded because an active market
exists for the conversion securities. Conversion right allows holder to obtain a
part of the long-term appreciation of corp’s assets by giving up preferred rights
and converting their shares into common shares. Conversion ratio typically
established so common shares must appreciate in price before profitable to
convert the preferred shares. (maybe a T/F question)
o Can convert different kinds of interests – not just preferred to common.
 351.180(5)
o Can convert an initial loan during incorporation into stock – might have
conversion rate much better than what will be available three years later.
Offers more favorable rate.
 Protective provisions – financial protections like sinking funds provision, which
requires corp to set aside amount to redeem a specified portion of the preferred
stock issue.
 Participating preferred – entitled to the specified dividend and after the
common shares receive a specified amount, they share with the common in
additional distributions on some predetermined basis. Combine features of
common and preferred stock.
Transfer Restrictions on Stock
 General rule for transfer restriction on ownership has to be both reasonable and conspicuous. actual
knowledge can substitute for the conspicuousness piece.

20
 o Reasonableness depends on whether there is anything unusual or oppressive in the provisions,
and the number of stockholders a seller might have to notify (twenty in this case held not
unreasonable). Ling & Co. v. Trinity
o Traditional view is that share transfer restrictions constitute a restraint on alienation and they
are therefore strictly construed.
o Modern view is more relaxed, but historic approach makes it important to specify clearly and
unambiguously the essential attributes of the restrictions. Should include whether the purchase is
optional or mandatory, who may or must purchase and it what sequence, manner price is
determined, time period given to person to decide whether or not to purchase, events triggering
restriction.
o Justifications:
 Entitlement to a program or eligibility of privilege administered by gov agency or
national security exchange – NY stock exchange in this case to police ownership interests
in member firms
 Enable owners in closely held corps to remain close and to select person who they want
to be associated with and permit withdrawing participants to liquidate their investments
on a reasonable basis.
o Common types of restrictions
 Option agreements – gives corp or other person right to purchase the shares
 Buy-sell agreements – obligates the corp or other person to purchase
 Method of valuation important
 In instance of death of shareholder – statute indicates value of property shall be
determined without regard to buy-sell agreement unless (if not IRS may seek
valuation for estate tax purposes considerably higher than amount received by
estate as payment for shares)
o agreement is bona fide biz arrangement
o not a device to transfer property to decedent family or estate for less than
full and adequate consideration
o has terms comparable to similar arrangements entered into by persons in
arms-length transactions.

Closely-Held Corps
 Agreement among shareholders attempted to divest directors of their power to discharge an unfaithful
employee is illegal as against public policy; stockholders may not control the director’s exercise of
judgment vested in them by virtue of the office to elect officers and fix salaries. Improper motives of
parties does not change the rule. McQuade v. Stoneham (NY Giants Baseball – contract).
o Become statutory close if want to do this.
 Sound basis for protecting shareholder in closely held corps is a detailed shareholder agreement
securing the rights and obligations to all concerned. Galler v. Galler (recognized unique problems in
applying corporate laws intended for public corporations to closely held corporations where shareholders in
most instances were also directors). Controlling factors in upholding agreement is absence of objecting
minority interest together with absence of detriment to public.
 Tag along rights – if majority is selling to third party, majority must arrange with third party the same price
per share for the minority shareholder – but must be in the agreement. Some scenarios the minority
shareholder might not have leverage to get provision into the agreement. Control premiums are flip side of
minority discounts – controlling shares will cost more because of long term benefit
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 Drag along rights- A drag-along right is a provision that enables a majority shareholder to force a minority
shareholder to join in the sale of a company. The majority owner doing the dragging must give the minority
shareholder the same price, terms, and conditions as any other seller.
 if worried about litigating these type of issues then should probably opt in as statutory close corp*
 Issuing Price – corp directors must show that the issuing price falls within some range justifiable on basis of
valid business reasons when conflict of interest is involved
 Preemptive rights –preemptive right is a privilege that may be extended to certain shareholders of a
corporation that grants them the right to purchase additional shares in the company prior to shares being
made available for purchase by the general public.
 Remedies for Oppressive Acts on Minority Shareholder’s
o Katzowitz v. Sidler – dilutive transaction demo’s why preemptive rights important,
especially in close corp where one owner did not have capacity or interest to invest in new
shares, so shares were issued to other shareholders far below market value as a tactic to dilute P’s
current investment. Judicial review is limited to whether, under all the circumstances,
additional offering of securities should be condemned because the directors in establishing
the sale price did not fix it with reference to financial consideration with respect to the
ready disposition of securities.
 Disparity between issuing price of the stock and its true value
 Nature of the corp
 Business necessity for establishing an offering price at a certain amount to facilitate
raising new capital
 Ability of stockholders to sell rights
o Modern trend – impose fiduciary duties on dilutive transactions such as this case.
o Buy-out  court may decree a buy-out in an appropriate case where less harsh remedies are
inadequate to protect the rights of the parties. Findings of conspiracy to deprive Sheerin of his
interest in the corp, together with acts of willful breach of duty, and the undisputed evidence
indicating Sheerin would be denied any future voice in the corp were sufficient to support
conclusion of oppressive conduct and likelihood it would continue. Davis v. Sheerin –
Conspiring to deprive one of his ownership of stock in a corp, especially when corp records
clearly indicate such ownership, is more oppressive than squeeze out techniques – such conduct
would substantially defeat any reasonable expectations Sheerin may have had but would
extinguish any expectations. informal dividends by making profit sharing contributions to their
benefit and to the exclusion of Sheerin – willful breach of fiduciary duty.
o Petition for dissolution on oppression grounds – others may circumvent dissolution by
electing to purchase P’s shares at fair value. courts look to appraisal statutes and precedents for
guidance. shareholders have rights to dissent from specified corp actions and to receive the
appraised fair value of their shares.
o Liquidation is more harsh remedy than buy-out
o Provisional director

Statutory Close-Corp
 Definition – 351.755 – corp whose articles explicitly state it is a statutory close corporation.
o Amendment approval needs 2/3 votes of each class or series of shares of the corp, voting as a
class or series, whether or not otherwise entitled to vote. If adopted, dissenting shareholders are
entitled to assert dissenter’s rights under 351.870
 Transferring Shares: 351.765 – interest in shares may only be transferred to the extent permitted in
the articles of incorporation or under 351.770 (otherwise interests are not to be voluntarily or
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 involuntarily transferred, by operation of law or otherwise,) This section does not apply to the following
transfers (unless articles provide otherwise):
o To the corp or any other holder of the same lass or series of shares
o Members of shareholder’s immediate family (spouse, parents, lineal descendants & their
spouses)
o Approved in writing by all holders with general voting rights
o To an executor upon death of a shareholder or to trustee as result of bankruptcy, insolvency,
dissolution, or similar proceeding brought against shareholder
o Merger or consolidation under 351.410 to 351.459, or an exchange of existing shares for other
shares of a different class or series in the corp
o Pledge as collateral for a loan that does not grant the pledgee any voting rights possessed by the
pledger  Achainan Case
o Made after termination of the corp’s status as statutory
 Statutory close corps subject to the other rules in 351 except where below statutes expressly override a
statute in 351.
o No more than 50
o Right of first refusal (person wanting to sell has to go to the co. and present to them an offer
they got from a 3rd party (bonafide offer) ask co. if they want to buy it instead, within time
period. Sometimes if co. passes other owners get chance) fairly common. Contrasting. Right of
of first look goes to partners first then 3rd party and solves the long time it could take for 3rd party
just to lose it in first refusal. Seller sets price.
o 351.800 – shareholder agreements
 (2)  can have agreement that eliminates board of directors – can operate without a
board entirely; or can restrict powers of board and make it operate more like a partnership
o 351.805 – elimination of board of directors  how to act without a board of directors; but must
be in articles of incorporation**
 operating like partnership creates liability? NO  351.825 (limited liability for manager
shareholders); but can still have veil piercing, but just fact that by-passing normal
corporate thing does not eliminate protection from personal liability.
o 351.825 – limited liability if fail to observe usual corporate formalities relating to the exercise of
corporate power or management of its business
 when all of the stockholders in a DE corp agree that, except as specified in their agreement, no business or
activities shall be conducted without the consent of a minority stockholder, the agreement is enforceable
between the original parties even though all formal steps required by statute have not been taken.
 Zion v. Kurtz: they failed to file the cert that they were a statutory close corp – but there was enough
evidence showing that they meant to let shareholders have the management power. But if you want
recognition need to file the election* even if have an agreement – otherwise the agreement might violate
public policy
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 o agreement made by the parties was violated when the corp entered into two agreements without
the minority stockholder’s consent.
o to declare unequivocally, as a matter of public policy, that stockholder agreement of this
character are not invalid. It recognizes a special subclass of close corps which operate by direct
stockholder management (statutory close should be construed to authorize all sorts of internal
agreements which are not affirmatively improper, or injurious to third parties

Missouri Partnerships
 Rights and duties of other partners in relation to the partnership shall be determined by default rules unless agreement
established between the parties. – Kessler (parties did not contemplate losses in agreement; ct cannot speculative
intent)
 358.240 (p.56) partner property rights (in specific partnership property, interest in partnership & right to
participate in management). 358.250  nature of partner’s rights in specific partnership property is co-
owner (tenants in partnership with other partners)
 Partnership opportunity case  Meinard v. Salmon (renovation of old hotel for use of shops) – majority
held defendant breach duty of loyalty among partners when didn’t share info about opportunity with partner.
 Absence of contrary agreement, a deadlock on a proposed change in the ordinary partnership business results
in the change not being authorized (Summers v. Dooley – disputed between trash biz partners).

Distributions –
 347.101: Default rule in member-managed LLC is to first repay capital contributions in proportion to amount
of cash or value of other contributions made by each, and after all such capital contributions have been
repaid, then further distributions apportioned equally among. Statutory restrictions on distributions:
include both balance sheet and an insolvency test –347.109
o Balance sheet test – after making the distribution would assets exceed liabilities? Yes can make
distribution.
o Insolvency test – after making distribution will have enough to make payments to future debts
o 358.280  Partner’s interest subject to charging orders.
 359.421  where courts give judgment to creditor they may charge the partnership interest of that partner
with the payment of unsatisfied amount of the judgment with partner’s interest. Judgment creditor has only
the rights of an assignee of the partnership interest (p. 59).
 Distribution to partner from partnership comes out of that partner’s capital account – Kessler
Impairment of capital test – compare value of net assets of company to stated capital  only applies to
corps  351.220.1

Important Terms, Rules & Holdings

 Charging order is lien on personal property of partner/owner. Creditors cant attack assets inside
partnership, but can get distributions from partnership that would have gone to the partner they are after.
o individual member can pledge to creditor on personal property owned by that member, but not
on the internal property of the business. This allows member to put a garnishment on their
interest, (§358.280 in MO)
 A constituency statute, allows corporate directors to consider non-shareholder interests when
making business decisions. 351.347 – acquisition proposals; example of constituency statute. Says In MO
you may think about social matters when making decision.
 Balance sheet – has historical costs but not the current value
 Contemporaneous ownership rule – owner since inception.

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 Proper Quorum: 351.265 – Quorum of outstanding shares –representation by proxy – representation of
false proxy, penalty. Has to be a majority for shareholder to act at meeting, can make greater than majority.
But cannot go other direction and make it only 40% passing. Min. is majority. If want to act without a
meeting it must be unanimous consent.
 Control shares v. premium shares
o Premium shares: the price of the shares are higher than their par value. This is quite
common, since the par value is typically set at a minimal value. The amount of the
premium is the difference between the par value and the selling price.
o Control shares: equity shares owned by major shareholders. These shareholders will
own either a majority of the shares or a portion of the shares that is significant enough
to allow them to exert a controlling influence on the decisions
o Control Premium – increase in stock price because they are control shares
 Perlman v. Feldman (steel case) – breach of fiduciary duty if control premium on stock
includes payment for a corp asset (not just rights in the stock sold)
 Conversion v. convertible security
o Conversion right allows holder to obtain a part of the long-term appreciation of corp’s assets by
giving up preferred rights and converting their shares into common shares. Conversion ratio
typically established so common shares must appreciate in price before profitable to convert the
preferred shares. (maybe a T/F question)
o Convertible preferred shares attractive when common shares are publicly traded because an
active market exists for the conversion securities.
 Can convert different kinds of interests – not just preferred to common.  351.180(5)
 Can convert an initial loan during incorporation into stock – might have conversion rate
much better than what will be available three years later. Offers more favorable rate.
 Directors and officers liability Insurance (often called "D&O") is liability insurance payable to the
directors and officers of a company, or to the organization(s) itself, as indemnification (reimbursement) for
losses or advancement of defense costs in the event an insured suffers such a loss as a result of a legal action
brought for alleged wrongful acts in their capacity as directors and officers.
 Efficient market hypothesis – a theory that states that asset prices fully reflect all available information. A
direct implication is that it is impossible to "beat the market" consistently on a risk-adjusted basis since
market prices should only react to new information.
 Equitable Subordination (money food chain)– high priority is pay employees and paying creditors for
debts, owners at the end of the money food chain. May see future inability to pay debts and wants to move
up from shareholder to creditor, not be above other creditors but above other shareholders. Claiming
company owes them for debt outside of shareholder interest. Even if do have legitimate claim for back
wages, you are still going to be put at the bottom as a shareholder  based on idea of taking advantage of
insider information that even a creditor cannot get their hands on.
 Internal affairs rule – provides that foreign courts should apply the law of the state of incorporation to
issues relating to the internal affairs of a foreign corporation. Some states have tried applying their
provisions to corporations formed in other states but whose PPOB is in their state.  disputes between
shareholders & management
 Fairness opinion – a professional opinion, provided by an investment bank or other third party, about
whether the price offered in a merger or acquisition deal is reasonable.
 Independent/outside directors – a director of a board of directors who does not have a material or
pecuniary relationship with company or related persons, except sitting fees.
 Insider trading – the illegal practice of trading on the stock exchange to one's own advantage through
having access to confidential information.
 Redemption v. Cross-Purchase

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 o Redemption rights – company has power to buy back redeemable shares at any time at fixed
price, and shareholders has no choice but to accept that price. May be made redeemable at option
of corp in articles of corp at time the class of preferred stock created.
 When corp exercises redemption privilege it “calls” the stock for redemption. Usually
can be exercised only after certain period of time and price is usually set somewhat in
excess of the amount of the shares liquidation preference.
 351.180.2  put right (holders can say I’m electing my option you buy my stock back to
corp) or the call action (holders have to sell it back to corp); catch is – provided at time of
redemption has to be entire class with voting rights.
o Cross purchase – not company, but owners. owner of interests sells interest to other owners of
interests (could take place in internal buy-outs, etc.)
 Sarbanes-Oxley Act of 2002 – enhanced conflict of interest provisions prohibiting personal loans to corp
executives. Unlawful for any public company to extend credit in form of personal loan to executive officer.
 Zone of insolvency – when company incurs debt and assets aren’t sufficient to pay it; point where
shareholders become moot and directors try to make enough just to pay off debt. If ZOI is coming, directors
should worry about debt and paying creditors. Then venture holders want to be directors and the articles can
be amended to string voting trusts their rights.
 Indentures – difference from bond is that ventures are unsecured. A type of debt and these people should get
paid before the owners.
Consequences of assignment of ownership interest –
Corporation is different. If voting stock and transfer voting stock then voting rights go with it.
In all unincorporated entities the default rule is that if assigned interest have only assigned economic interest,
and haven’t transferred management rights unless agreed otherwise.
 § 358.270 assignees in partnerships: How to balance assignment of partnership interest?
o Right of first refusal (requires find legit offer from outside and bring to partners) –
problem: are you limiting # of prospective buyers by having to tell them can’t accept offer until
bring back to co-owners. Don’t want outsider to waste time. Solution: right of first look (go to
partners first then outside).  want to sell interest so ask other partners first if they want to
buy, they say no, then go out and look for other buyers outside of partnership. Can’t be less than
what offered to other partners.
o transferring partnership interests – Default rule for all unincorp – if trying to make someone
new member in bus, everyone has to consent, but have flexibility to say something different in
partnership or operating agreement. Could say need 51% or simple majority of consent, etc. 
BUT does that mean per capita or by voting per percentage of ownership??
o Ranoport: Unless the parties have agreed otherwise, a person cannot become a member of a
partnership without consent of all the partners. Assignee is excluded in the absence of agreement
from interfering in the management of partnership and from access to the partnership books and
information about partnership transactions.
 transferring voting rights in LLC – if transferee of an ownership interest is not unanimously approved
by remaining members, transferee maintains rights of equity ownership but will not be a member
o management only if unanimous vote
WITHDRAW (disassociation)– difference in power to withdraw and whether its rightful
o Partners in partnership, LP, LLP, and LLLP – always have power to withdraw, but if promise not to and
do it anyway then they are subject to damages
o LP or LLLP – difference between partners and limited partners
 General – have power to withdraw at any time so long as written notice; but if wrongful breached
duty and liable for damages
 Limited – no statutory right; default is no power to withdraw; can grant in partnership agreement

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 LLC member (owner)– can withdraw at any time but have to put in writing and give at least 90 days prior
notice (only entity with days’ notice). Subject to damages if withdraw wrongfully. Withdraw of member or
manager does not cause dissolution. applies to both member or manager) – unless otherwise in articles;
if not, remaining member it doesn’t necessarily mean there will be a dissolution but specific action must be
taken to avoid it.
 Lieberman v. Wyo. (min oppression in LLC)  rightful withdraw but agreement did not specify
how to settle ownership interests. Default rule applied and maintained equitable interest. Big player
offered to buy out P and used their offer as the value of his P interest

Dissolution & Winding up

Dissolution in corporations is either judicial or dissolution by a vote***
 Judicial Dissolution (closely-held)
o Radom (50/50 standoff b/wn siblings) – court denied request because no absolute right to
dissolution under such circumstances. order is granted only when the competing interests are
so discordant as to prevent efficient management and the object of its corporate existence
cannot be attained. prime inquiry for the necessity of dissolution is whether the judicially-
imposed death will be beneficial to the stockholders or members and not injurious to the public.
Despite the feuding, there is no stalemate or impasse to corporate policy; corp is not sick, but
flourishing; dissolution is not necessary for the corp or either stockholder.
 Judicial Dissolution as answer to oppressive conduct  oppression only deemed to arise when majority
conduct: (1) substantially defeats expectations that are reasonable under the circumstances, and (2) were
central to minority’s decision to join the venture. (de facto dividends award to all except a class of minority
shareholders may constitute oppressive action to serve basis for judicial dissolution.
o Wilkes: actions of the controlling group in this case were not protected by the business judgment
rule because evidence of bad faith in that they were cutting off Wilkes other benefits in an effort
to force Wilkes to sell out cheap  not a legit business purpose. Closely held corporations have
different standards  more judicial scrutiny required than conventional business judgment rule
deference because of the partnership like fiduciary duties owed.
 Corp distributed profits in the form of salries – de facto dividends, therefore cutting off
his salary along w/ never declaring dividend assured Wilkes NO RETURN on
investment.
 When legit business purpose is asserted, the minority must show same legit objective
could have been achieved via alternative course less harmful to minority
o Kemp: reasonable expectations frustrated and w/o adequate means of recovering investment.
Invested capital with expectation of receiving dividends. (employees were there a very long time
and continued to get dividend payments for years, expectations clear in this case – dividend
policy changed right before or after their retirement & Defendants were giving more money to
themselves and depriving minority shareholders)
o Merola: employment termination was not a breach b/c term was not for majority financial gain
nor contrary to public policy. Termination was in accordance w/ employee contract & fairly
compensated for stock. Harm was suffered in employment capacity, not capacity as shareholder.

Partnership – dissolution does not auto lead to winding up and termination

 if partner withdraws or a new partner is admitted– Partnership auto dissolves, but does not auto
lead to winding up and term. To be able to not wind up have to make sure other partners to take over.
o When dissolution is caused in any way (except contravention of agreement) each partner may
have the partnership property applied to discharge its liabilities.

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 o if no partnership agreement, partnership is at will. a partnership at will, which has no definite
term and can rightfully be dissolved by express will of any partner, they could rightfully dissolve
without consent.
o In-kind is fair to all partners if: only former partners Interested in the assets of the business
(ordering sale would be senseless) and if no debts to be paid from the [Link] when
making in-kind distribution decision because it might affect creditor’s right to collect debt owed
since assets as a whole may be worth more than assets divided up.
o Distribution by sale: if others are interested, a sale provides a more accurate way to establish
market value of assets, and better assures each partner his share in the value of the assets.
o When a dissolution sale may not generate fair value for the business
 Business may be so dependent on the skills of the majority shareholder that the majority
himself is the only realistic purchaser of bus and without competition at the public sale,
the majority may be able to purchase far below value
 Even if minority could run it without the majority, may not have sufficient capital to bid
competitively at the sale
 Fire sales –
 Business is not always operated between appointment of the receiver or court appointer
auctioneer- time may pass and consumers and venders of the corp may develop
relationships and preferences for another company.
 If partner dissociates, but partnership not wound up, entitled to receive the “buy-out” price.
o Is dissociation was wrongful – damages may offset buy-out price and payment may be deferred
until expiration of the term or completion of the undertaking, unless partner establishes to the
satisfaction of the court that earlier payment will not cause undue hardship to the business of the
partnership.
o Deferred payment must be adequately secured and bear interest.
o a partner who wrongfully dissociates is liable to the partnership and to the other partners for
damages caused by the dissociation. A partner dissociation is wrongful if it is in breach of an
express provision of the partnership agreement.
 Dissolution Causes in partnership – 358.310:
o Without violating the agreement – rightful
 Termination of specific term in agreement
 Express will of any partner when no definite term is specified
 Express will of any partner who has not assigned their interests or suffered interests to be
charged for separate debts either before or after the term of any specific term in
agreement
 Bona fide expulsion of any partner (in accordance with power conferred by agreement)
o In contravention of the agreement where circumstances do not permit dissolution under another
section by express will of any partner – wrongful
o Withdraw from a term partnership before the end of the term (rest below not explicitly stated)

LLC – affirmative vote

 affirmative vote intended to cause dissolution unless otherwise written in articles. Once
dissolved will for sure cause winding up and that leads to termination.
 In limited partnership or LLLP general partner withdraw triggers dissolution & winding up
even if against agreement; LP withdraw does not cause dissolution
o UNLESS  TWO alternatives
 At least one GP remains and provisions permit LP to be carried on alone or with
NEW partners; or

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  Within 90 days, partners owning majority of interests and majority of capital held by
all partners agree in writing to cont business, and if no remaining GP, appointment
of one or more if necessary or desired.  avoided dissolution through special
action

LP – dissolved and affairs wound up upon occurrence of: (359.451)

(1) happening of events specified in LP certificate;
(2) w happening of events agreed upon in partnership agreement;
(3) written consent of all partners;
(4) event of withdrawal of general partner (259.241)  359.331 says GP can withdrawal with written
notice even if in contravention with partnership agreement.

Notes: 358.260: all interest is personal property.

Test: you can withdraw you may still have to pay damages

BUY A SECURITY?
Rebuttable presumptions: start with agency law. Regular general partnership the rebuttable
presumption is that you’re not buying a security. Bc everyone can sign for co. with LLPand LLLP don’t
have limited partners. Are general partnerships where everyone is an agent 358.090. just liability thing,
doesn’t change agency authority. Didn’t buy a security. Limited partnerships, the general partner
interest is involved in managing business so they don’t buy security. Member in member managed LLC
not a security, agent. Limited partner in LLP or LLLP did buy a security. An interest as a non manager
member in a manager managed LLC is a security.
Even CEO bought a security in corp.

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