Case Briefs on Corporate Law

Yin Huang

September 25, 2010

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Contents

1 The Duty of Care 51.1 Joy v. North . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51.2 Dodge v. Ford Motor Co. . . . . . . . . . . . . . . . . . . . . . 51.3 A.P. Smith Manufacturing Co. v. Barlow . . . . . . . . . . . . 51.4 Katz v. Oak Industries, Inc. . . . . . . . . . . . . . . . . . . . 61.5 Credit Lyonnais Bank Nederland, N.V. v. Pathe Communica-

tions Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61.6 Francis v. United Jersey Bank . . . . . . . . . . . . . . . . . . 71.7 In re Emerging Communications, Inc. Shareholders Litigation 81.8 Kamin v. American Express Co. . . . . . . . . . . . . . . . . . 81.9 Smith v. Van Gorkom . . . . . . . . . . . . . . . . . . . . . . 91.10 In re Caremark International Inc. Derivative Litigation . . . . 121.11 Malpiede v. Townson . . . . . . . . . . . . . . . . . . . . . . . 131.12 Gantler v. Stephens . . . . . . . . . . . . . . . . . . . . . . . . 141.13 Lyondell Chemical Co. v. Ryan . . . . . . . . . . . . . . . . . 16

2 The Duty of Loyalty: Self-Dealing and Corporate Opportu-nities 162.1 Lewis v. S.L. & E., Inc. . . . . . . . . . . . . . . . . . . . . . . 162.2 Cookies Food Products v. Lakes Warehouse . . . . . . . . . . 172.3 Hawaiian International Finances, Inc. v. Pablo . . . . . . . . . 192.4 Forkin v. Cole . . . . . . . . . . . . . . . . . . . . . . . . . . . 202.5 Northeast Harbor Golf Club, Inc. v. Harris . . . . . . . . . . . 202.6 Broz v. Cellular Information Systems, Inc. . . . . . . . . . . . 212.7 In re eBay, Inc. Shareholders Litigation . . . . . . . . . . . . . 232.8 Tyson Foods, Inc. (Tyson II) . . . . . . . . . . . . . . . . . . . 23

3 Duty of Loyalty: Controlling Shareholders 243.1 Zahn v. Transamerica Corp. . . . . . . . . . . . . . . . . . . . 243.2 Sinclair Oil Corp. v. Levien . . . . . . . . . . . . . . . . . . . 253.3 David J. Greene & Co. v. Dunhill International, Inc. . . . . . 273.4 Kahn v. Lynch Communications Systems, Inc. . . . . . . . . . 273.5 Levco Alternative Fund v. The Reader’s Digest Association,

Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293.6 In re Trados Inc. Shareholder Litigation . . . . . . . . . . . . 29

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4 The Voting System: Allocation of Legal Powers and ProxyRules 314.1 Charlestown Boot & Shoe Co. v. Dunsmore . . . . . . . . . . 314.2 People ex rel. Manice v. Powell . . . . . . . . . . . . . . . . . 324.3 Schnell v. Chris-Craft Industries, Inc. . . . . . . . . . . . . . . 324.4 Blasius Industries Inc. v. Atlas Corp. . . . . . . . . . . . . . . 334.5 Condec Corp. v. Lunkenheimer Co. . . . . . . . . . . . . . . . 344.6 J.I. Case Co. v. Borak . . . . . . . . . . . . . . . . . . . . . . 344.7 Wyandotte v. United States . . . . . . . . . . . . . . . . . . . 354.8 Cort v. Ash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 354.9 Mills v. Electric Auto-Lite Co. . . . . . . . . . . . . . . . . . . 354.10 TSC Industries v. Northway, Inc. . . . . . . . . . . . . . . . . 364.11 Virginia Bankshares, Inc. v. Sandberg . . . . . . . . . . . . . . 374.12 Rosenfeld v. Fairchild Engine & Airplane Corp. . . . . . . . . 38

5 Transactions in Control 395.1 Zetlin v. Hanson Holdings, Inc. . . . . . . . . . . . . . . . . . 395.2 Gerdes v. Reynolds . . . . . . . . . . . . . . . . . . . . . . . . 405.3 Perlman v. Feldmann . . . . . . . . . . . . . . . . . . . . . . . 415.4 Brecher v. Gregg . . . . . . . . . . . . . . . . . . . . . . . . . 425.5 Essex Universal Corp. v. Yates . . . . . . . . . . . . . . . . . . 43

6 Mergers and Acquisitions: The Legal and Business Struc-ture 456.1 Hollinger, Inc. v. Hollinger International, Inc. . . . . . . . . . 456.2 Hariton v. Arco Electronics, Inc. . . . . . . . . . . . . . . . . . 466.3 Heilbrunn v. Sun Chemical Corp. . . . . . . . . . . . . . . . . 476.4 Farris v. Glen Alden Corp. . . . . . . . . . . . . . . . . . . . . 476.5 Rath v. Rath Packing Co. . . . . . . . . . . . . . . . . . . . . 486.6 Terry v. Penn Central Corp. . . . . . . . . . . . . . . . . . . . 48

7 Mergers and Acquisitions: Freeze-outs and the AppraisalRight 497.1 Leader v. Hycor, Inc. . . . . . . . . . . . . . . . . . . . . . . . 497.2 MT Properties, Inc. v. CMC Real Estate Corp. . . . . . . . . 507.3 Weinberger v. UOP, Inc. . . . . . . . . . . . . . . . . . . . . . 507.4 Glassman v. Unocal Exploration Corp. . . . . . . . . . . . . . 507.5 Solomon v. Pathe . . . . . . . . . . . . . . . . . . . . . . . . . 51

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7.6 Coggins v. New England Patriots Football Club, Inc. . . . . . 527.7 Alpert v. 28 Williams Street Corp. . . . . . . . . . . . . . . . 52

8 Public Contests for Corporate Control: Part 1 528.1 Unocal Corp. v. Mesa Petroleum Co. . . . . . . . . . . . . . . 528.2 Moran v. Household International, Inc. . . . . . . . . . . . . . 548.3 Carmody v. Toll Brothers . . . . . . . . . . . . . . . . . . . . 558.4 Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. . . . . . 558.5 Barkan v. Amsted . . . . . . . . . . . . . . . . . . . . . . . . . 56

9 Public Contests for Corporate Control: Part 2 569.1 Paramount Communications, Inc. v. QVC Network . . . . . . 56

10 Miscellaneous Cases 5710.1 Emerald Partners v. Berlin . . . . . . . . . . . . . . . . . . . . 5710.2 Pure Resources, Inc. Shareholders Litigation . . . . . . . . . . 57

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1 The Duty of Care

1.1 Joy v. North

692 F.2d 880 (2d Cir. 1982)

Squib The Second Circuit held that directors’ decisions as to the risk ofcorporate investments should be reviewed under the business judgment rule.The court found that the business judgment rule would prevent directorsfrom being unduly punished for taking risks.

1.2 Dodge v. Ford Motor Co.

204 Mich. 459 (1919)

Squib Ford Motor Company was making enormous profits on cars. Afterdistributing considerable dividends for several years, Henry Ford decidedthat the company should reduce dividends and use the money to expand itsbusiness and lower the price of its cars. The Michigan Supreme Court heldthat the company’s directors had no power to place humanitarian concernsover the maximization of immediate profits.

1.3 A.P. Smith Manufacturing Co. v. Barlow

13 N.J. 145 (1953)

1.3.1 Overview

The New Jersey Supreme Court held that a corporation may make donationsto the public good.

1.3.2 Facts

A.P. Smith Manufacturing Company made a donation to Princeton Univer-sity. According to the president of the company, the donation was “good”business” because it helped to produce an educated citizenry from which thecompany could hire. The president further stated that such donations werea “reasonable and justified public expectation.” The company’s shareholderssued on the ground that the company’s charter allowed no such donations.

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1.3.3 Issue

May a corporation make donations for the public good?

1.3.4 Holding

A corporation may make donations for the public good.

1.3.5 Reasoning

Jacobs, J. The realities of the twentieth century have driven courts toconstrue corporate powers more and more broadly. The original restrictionson corporate powers developed in the nineteenth century, when wealth wasconcentrated in private hands rather than corporations. As corporationsbecame more powerful, new legislation allowed them to donate within broadlimits. Since nothing suggests that the donation was made to a pet charity,the donation is valid.

1.4 Katz v. Oak Industries, Inc.

508 A.2d 873 (Del.Ch. 1986)

Squib The Chancery Court of Delaware held that corporate directors mustprioritize the interests of shareholders even if that prioritization comes at theexpense of bondholders.

1.5 Credit Lyonnais Bank Nederland, N.V. v. PatheCommunications Corp.

1991 WL 277613 (Del.Ch. 1991)

Squib The Delaware Court of Chancery observed that some special cir-cumstances may cause a corporate board to owe a fiduciary duty not just toshareholders but to the corporate enterprise as a whole. The court providedan example illustrating how directors should act when their corporation is“operating in the vicinity of insolvency.”

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1.6 Francis v. United Jersey Bank

87 N.J. 15 (1981)

1.6.1 Overview

The New Jersey Supreme Court held that corporate directors owe a dutyof care to their corporation and its shareholders. The court outlined theresponsibilities that arise from the duty of care.

1.6.2 Facts

Pritchard & Baird Intermediaries Corporation was a reinsurance broker. Thecompany acted as a “middle man” between insurance companies seeking toindemnify each other for insurance claims. The company had begun as a part-nership co-founded by Charles Prichard, Sr. (“Charles Sr.”) but eventuallybecame a corporation whose whose board included Lillian Pritchard (“Lil-lian”), William Pritchard (“William”), and Charles Pritchard, Jr. (“CharlesJr.”). Following the death of Charles Sr., Charles Jr. and William beganto abuse the company’s finances by withdrawing increasing sums of moneyfrom its accounts under the guise of “shareholder loans.” Although the with-drawals created enormous capital deficits that eventually forced the companyinto bankruptcy, Lillian did nothing to rein in the abuse.

1.6.3 Issue

(1) Did Lillian Pritchard breach a duty of care to the corporation and itsshareholders? (2) If so, was the breach a proximate cause of the bankruptcy?

1.6.4 Holding

(1) Lillian Pritchard breached a duty of care to the corporation and its share-holders. (2) The breach was a proximate cause of the bankruptcy.

1.6.5 Reasoning

Pollock, J. Corporate directors owe a duty of care to the corporation andits shareholders. While the specific responsibilities vary according to thenature of the corporation, the duty of care requires directors to have at least

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a rudimentary understanding of the corporation’s business as well as up-to-date knowledge of the corporation’s activities. Although a director need notpersonally audit the corporation’s accounts, directors should review financialstatements to keep abreast of its financial situation. Therefore, a directormay not excuse his failure to discharge this duty by claiming ignorance ofthe corporation’s state.

Despite being a director of Pritchard & Baird, Lillian was entirely de-tached from the company’s affairs. Had she reviewed its financial statements,she would immediately have realized that Charles Jr. and William were mak-ing improper withdrawals from the company’s accounts. The obviousness ofthe withdrawals means that Lillian also had an obligation to attempt reiningin the abuse. Her failure to intervene was therefore a proximate cause of thebankruptcy.

1.7 In re Emerging Communications, Inc. Sharehold-ers Litigation

2004 WL 1305745 (2004)

Squib The court found that a director violated his duty of care by agreeingto a merger in which his corporation would be purchased for an excessivelylow price. According to the court, the director’s financial expertise shouldhave alerted him to the fact that the proposed price was unfairly low. Thecourt held that this knowledge obligated him to object to the merger.

1.8 Kamin v. American Express Co.

383 N.Y.S.2d 807 (1976)

1.8.1 Overview

The New York State Supreme Court held that the business-judgment ruleinsulates corporate directors from liability for a decision as long as they madethe decision on an informed basis and with good faith.

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1.8.2 Facts

American Express Company had purchased a significant amount of stock inanother corporation. Although the purchase price of the stock was $29.9 mil-lion, the stock eventually depreciated to a value of only $4 million. AmericanExpress then faced a choice as to the disposition of the stock. The first choicewas to sell the stock on the open market, in which case the company wouldbe entitled to a tax break of $8 million. The second choice was to forgo thetax break and distribute the stock as dividends to American Express’s ownshareholders. The directors considered both choices and ultimately decidedon the second course of action. Shareholders then sued on the ground thatthe directors had wasted the company’s assets by failing to take advantageof the tax break.

1.8.3 Issue

Should the directors be liable for committing waste?

1.8.4 Holding

The directors should not be liable for committing waste.

1.8.5 Reasoning

Edward J. Greenfield, Justice. Because the complaint does not claimthat the directors engaged in self-dealing or any other form of bad faith, thedecision must be reviewed under the business-judgment rule. The business-judgment rule states that directors are not liable for the results of a decisionas long as they made that decision on an informed basis and in good faith.Since the directors considered both courses of action at some length, theycannot be held liable simply because the decision turned out badly.

1.9 Smith v. Van Gorkom

488 A.2d 588 (Del. 1985)

1.9.1 Overview

The Delaware Supreme Court declined to apply the business-judgment rulein reviewing a merger approved by insufficiently informed directors. The

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court found that the directors had breached their duty of care by approvingthe merger.

1.9.2 Facts

Trans Union Corporation (“Trans Union”) was a diversified holding company.Although the company generated considerable revenue, it consistently faceddifficulties in making enough money to fulfill its tax obligations. JeromeVan Gorkom, a director of the corporation, proposed solving the problem byallowing another corporation to acquire Trans Union in a leveraged buyout(LBO). The board considered the possibility only briefly. Donald Romans,the Chief Financial Officer, and Bruce Chelberg, the Chief Operating Officer,performed a cursory analysis of the feasibility of an LBO and concluded that$50 per share would be an “easy” price for such a transaction while $60per share would be “very difficult.” Based on this analysis, Van Gorkomexpressed his willingness to sell his 75,000 shares of the company for $55 pershare.

Rather than further discussing Trans Union’s options with the board,Van Gorkom approached Jay Pritzker, a takeover specialist and social ac-quaintance, with the possibility of acquiring Trans Union through a merger.Van Gorkom did not disclose to the board his contact with Pritzker, ask-ing only Carl Peterson, the Controller, to analyze the feasibility of an LBOat $55 per share. Pritzker eventually agreed to a cash-out merger in whichPritzker’s New T Company would acquire Trans Union at $55 per share. Toaddress Van Gorkom’s concerns as to the fairness of the price, the MergerAgreement allowed Trans Union to perform a ninety-day “market test” todetermine whether a higher price could be obtained. Since Pritzker was tak-ing the risk of losing Trans Union to a higher bidder, the Agreement alsogave Pritzker an option to buy 1 million shares of Trans Union at $38—75cents above the most recent closing price. In the rush to finalize the transac-tion, the Agreement was drafted “sometimes with discussion and sometimesnot.” Van Gorkom conspicuously retained James Brennan, an independentattorney, to represent Trans Union and never consulted Trans Union’s legaldepartment.

Van Gorkom announced the merger to the other directors at a subsequentboard meeting, but the subject of the meeting was not disclosed beforehand.Only Romans and Chelberg had any prior knowledge of the merger. Duringthe meeting, Van Gorkom described the terms of the merger orally, sup-

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ported only by statements from Romans, Chelberg, and Brennan. Copiesof the Agreement were not available until after the meeting. Despite initialopposition to the merger, the board ultimately approved the transaction.

The public announcement of the merger, however, set off a wave of protestfrom Trans Union’s managers. Faced with the possibility of en masse resig-nation in the management ranks, Van Gorkom convinced Pritzker to modifythe Agreement. Although news of the modifications temporarily appeasedthe managers, the revised Agreement actually worked against Trans Union’sinterests by placing additional constraints on Trans Union’s ability to with-draw from the merger upon receiving a better offer than Pritzker’s. Evenso, the board again approved the merger without reviewing a copy of theAgreement.

1.9.3 Issue

Did Trans Union’s directors make an informed business judgment in approv-ing the merger?

1.9.4 Holding

Trans Union’s directors did not make an informed business judgment in ap-proving the merger.

1.9.5 Reasoning

Horsey, Justice (for the majority): The directors should not have reliedsolely on Van Gorkom’s oral presentation of the merger in approving thetransaction. Van Gorkom did not supply copies of the Merger Agreement forreview during either meeting, nor did he explain how he concluded that $55per share would be a fair price. Although directors are entitled to rely upon“reports made by officers” in making business decisions, the oral statementsof Van Gorkom, Romans, and Chelberg were too uninformed to qualify as“reports.”

Although the price of $55 per share represented a substantial premiumover Trans Union’s market price of $38 per share, the existence of such apremium alone does not establish the fairness of the transaction. Becausethe market price may undervalue the company, the directors should haveundertaken a detailed valuation.

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Likewise, the market test failed to establish fairness because the Agree-ment severely limited Trans Union’s ability to accept offers better thanPritzker’s. The original Agreement prohibited Trans Union from solicitingoffers, and the revised version hampered Trans Union’s ability to withdrawfrom the merger even if a better offer were forthcoming. Given these restric-tions, the directors should have realized that no realistic market test wasattainable.

McNeilly, Justice, dissenting . . . The majority ignores that TransUnion’s directors had been discussing the tax problem long before the mergerarose. Since the directors discussed the problem at length, their decision withregard to the merger should be considered an informed business judgment.

1.10 In re Caremark International Inc. Derivative Lit-igation

698 A.2d 959 (Del.Ch. 1996)

1.10.1 Overview

The Chancery Court of Delaware declined to impose liability on the directorsof a corporation whose employees had engaged in conduct that resulted in acriminal investigation of the company.

1.10.2 Facts

Caremark International provided healthcare services. Because Caremark rou-tinely contracted the services of independent physicians, the company facedthe possibility of violating the Anti-Referral Payments Law (“ARPL”). TheARPL prohibited healthcare providers from paying “kickbacks” to physicianswho referred Medicare of Medicaid patients to their services.

Although Caremark published a “Guide to Contractual Relationships”instructing employees on compliance with the ARPL, the company was in-dicted for allegedly paying kickbacks to a Minneapolis physician. During theinvestigation, Caremark updated its Guide and implemented procedures forthe approval of contracts with independent physicians.

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After Caremark settled the criminal case, shareholders sued on the groundthat the company’s directors had breached their duty of care by failing todetect and thwart the conduct that led to the criminal investigation.

1.10.3 Issue

Did Caremark’s directors breach their duty of care by failing to detect andthwart the conduct that led to the criminal investigation?

1.10.4 Holding

Caremark’s directors did not breach their duty of care by failing to detectand thwart the conduct that led to the criminal investigation.

1.10.5 Reasoning

Allen, Chancellor. Corporate directors must make a good-faith effort toimplement effective methods of monitoring the company’s employees and de-tecting wrongdoing, but the precise nature of the monitoring system shouldbe left to the directors’ judgment. As long as directors ensure that suchgood-faith monitoring exists, they should not face liability simply for assum-ing the integrity of the company’s employees. Since Caremark implementedprocedures to prevent the violation of the ARPL, the directors should notbe liable for the cost of the settlement.

1.11 Malpiede v. Townson

780 A.2d 1075 (Del. 2001)

1.11.1 Overview

The Delaware Supreme Court held that § 102(b)(7) of the Delaware GeneralCorporation Law insulated directors from personal liability for breaching theduty of care.

1.11.2 Facts

Frederick’s of Hollywood was negotiating a merger with Knightsbridge Capi-tal Corporation. The terms of the merger restricted Frederick’s from negoti-ating with competing bidders. Despite that Frederick’s subsequently received

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higher bids from two other prospective buyers, the directors of Frederick’scompleted the merger with Knightsbridge. Shareholders of Frederick’s thensued on the ground that the directors had breached the duty of care by failingto consider the higher bids..

1.11.3 Issue

Can the directors be personally liable for breaching the duty of care?

1.11.4 Holding

The directors cannot be personally liable for breaching the duty of care.

1.11.5 Reasoning

Veasey, Chief Justice: Section 102(b)(7) of the Delaware General Corpo-ration Law insulates directors from personal liability for breaching the dutyof care. Since the shareholders have not alleged that the directors engagedin conduct falling within any of the exceptions to § 102(b)(7), the directorscannot be held personally liable.

1.12 Gantler v. Stephens

965 A.2d 695 (Del. 2009)

1.12.1 Overview

The Supreme Court of Delaware held that the directors of a corporation maybreach their fiduciary duty by frustrating its sale.

1.12.2 Facts

First Niles Financial, Inc. (“First Niles”) was a holding company whose solebusiness was to own and operate Home Federal Savings and Loan Associ-ation of Niles (“Home Federal”). Several directors of First Nile, includingGantler, did business with the company through their own businesses. Whena depressed local economy dimmed the company’s prospects, the board con-sidered selling the company. Although three prospective buyers approachedFirst Niles with bids the directors deemed acceptable, negotiations with all

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three parties ultimately failed. Gantler dragged his feet in providing due-diligence materials to the first two buyers. The directors rejected the offer ofthe third buyer.

The directors ultimately decided to concentrate voting power in their ownhands by reclassifying First Niles’s stock. Although the reclassification wasapproved by a shareholder vote, the directors did not disclose the extent towhich their own businesses did business with First Niles. Shareholders thensued the directors for breaching their fiduciary duty.

1.12.3 Issue

Does the conduct of First Niles’s directors support a claim that the directorsbreached their fiduciary duty?

1.12.4 Holding

The conduct of First Niles’s directors supports a claim that the directorsbreached their fiduciary duty.

1.12.5 Reasoning

Jacobs, Justice. The decisions of a corporate board are reviewed underthe business-judgment rule unless the plaintiff demonstrates that the direc-tors failed to make an informed and impartial decision. The plaintiff cannotovercome the business-judgment rule simply by pointing to the directors’ de-sire to entrench themselves. Because all directors face the possibility of beingdismissed upon the sale of their corporation, the plaintiff must identify someelement of self-interest beyond the mere continuation of service as a boardmember.

Since the directors had business ties to First Niles through their ownbusinesses, the circumstances support the claim that the directors breachedtheir fiduciary duty in refusing to sell First Niles. Although shareholderapproval of a self-interested decision may reinstate the business-judgmentrule, reinstatement does not apply here because the directors failed to disclosetheir personal ties to First Niles in the proxy statement accompanying thevote.

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1.13 Lyondell Chemical Co. v. Ryan

979 A.2d 235 (Del. 2009)

1.13.1 Overview

1.13.2 Facts

1.13.3 Issue

1.13.4 Holding

1.13.5 Reasoning

2 The Duty of Loyalty: Self-Dealing and Cor-

porate Opportunities

2.1 Lewis v. S.L. & E., Inc.

629 F.2d 764 (2d Cir. 1980)

2.1.1 Overview

The Second Circuit declined to apply the business-judgment rule in review-ing a transaction in which the directors of a corporation had engaged inself-dealing. The court held instead that the defendants had the burden ofestablishing that the transaction was fair and reasonable.

2.1.2 Facts

The Lewis family operated a business consisting of two corporations: S.L. &E., Inc. (“SLE”) and Lewis General Tires, Inc. (“LGT”). The organizationof the business was such that SLE owned the land on which LGT carriedout its operations. SLE leased the land to LGT at an annual rent of $14,400between 1966 and 1971, though the formal terms of the lease were never givenmuch attention despite significant fluctuations in the real-estate market. Thefamily members seemed to believe that the precise terms of the lease wereimmaterial since SLE existed purely to serve the needs of LGT. They alsoapparently ignored that there existed some shareholders of SLE who werenot simultaneously shareholders of LGT.

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Eventually, the affairs of the business became such that Donald Lewis(“Donald”) owned only shares of SLE. At that time, several of his siblings—Richard Lewis, Alan Lewis, and Leon Lewis, Jr.—owned enough shares ofSLE and LGT to serve as directors for both corporations. In short, thereexisted a situation in which the directors of SLE constituted a subset of thedirectors of LGT. When the siblings attempted to exercise an option to buyDonald’s shares of SLE, Donald charged that they had wasted SLE’s assetsby “grossly undercharging” LGT for the use of SLE’s land.

2.1.3 Issue

(1) Which party bears the burden of proof as to whether SLE’s directors hadcommitted waste? (2) Did that party discharge the burden?

2.1.4 Holding

(1) The defendants bear the burden of proving that they committed no waste.(2) The defendants failed to discharge the burden.

2.1.5 Reasoning

Although an informed decision by the directors of a corporation is normallyreviewed using the business-judgment rule, the rule does not apply whenthe directors face a conflict of interest. In such cases, the directors havethe burden of proving that their decision was fair and reasonable to thecorporation.

The defendants have plainly failed to discharge the burden. Expert testi-mony established that the market rent during the relevant period was morethan $39,000 per year and that such a rent was well within the means of LGT.The defendants’ claims of LGT’s financial infirmity belie their incentive togive themselves higher salaries.

2.2 Cookies Food Products v. Lakes Warehouse

430 N.W.2d 447 (Iowa 1988)

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2.2.1 Overview

The Supreme Court of Iowa declined to hold the director of a corporationliable for breaching the fiduciary duty even though he had engaged in trans-actions with the potential to create a conflict of interest. The court foundthat the director discharged the burden of proving that the transactions werefair.

2.2.2 Facts

L. D. Cook founded Cookies Food Products, Inc. to produce and distribute abarbecue sauce that he had created. The shares of the corporation belongedto Cook, Duane Herrig (the defendant), and thirty-some other shareholders.In addition to being a minority shareholder of Cookies, Herrig owned andoperated two other corporations: Lakes Warehouse Distributing, Inc., andSpeed’s Automotive Co., Inc.

When Cookies found itself in dire financial straits after its first year inbusiness, its directors approached Herrig with the proposition that he usethe resources of his two other corporations to distribute Cookies’s barbecuesauce. Herrig entered into an exclusive distribution with Cookies, and hisassistance led to a phenomenal growth in sales.

Herrig became a majority shareholder of Cookies upon Cook’s retirement.Upon assuming control of the corporation, he replaced several directors withhis own appointees. Herrig also took on additional responsibilities withinthe business, most notably by developing a taco sauce for which he receivedroyalties from Cookies. The directors also authorized the corporation to payHerrig $1,000 per month for the time he spent managing the business.

Because Cookies distributed no dividends during this period of growth,the minority shareholders became dissatisfied with their inability to profitfrom the corporation. They sued on the ground that Herrig had improperlyprofited from self-dealing arrangements with Cookies.

2.2.3 Issue

Did Herrig prove that he acted in good faith, honesty, and fairness despitethe self-dealing nature of his arrangements with Cookies?

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2.2.4 Holding

Herrig proved that he acted in good faith, honesty, and fairness.

2.2.5 Reasoning

Neuman, Justice. Nothing suggests that Herrig failed to disclose the prof-its he made from his relationship with Cookies. The evidence shows thatHerrig was instrumental in the success of Cookies. Trial testimony suggeststhat he may actually have been underpaid for the amount of work he did.

Schultz, Justice, dissenting. The majority has absolved Herrig of liabil-ity without properly analyzing whether his arrangements with Cookies wereactually fair. The evidence suggests that the corporation could have savedmoney by hiring other individuals to perform Herrig’s work. That Herrigcontributed to the success of the business has no bearing on whether hisdealings with the business were fair.

2.3 Hawaiian International Finances, Inc. v. Pablo

53 Haw. 149 (1971)

2.3.1 Overview

The Supreme Court of Hawaii found that the director of a corporationbreached his fiduciary duty when he accepted undisclosed commissions fromthe sale of real estate to the corporation.

2.3.2 Facts

Pastor Pablo (“Pablo”) and Rufina Pablo were the directors of Pastor PabloRealty, Inc. At the same time, Pablo served as the president of HawaiianInternational. Pablo advised Hawaiian International as to the availability forpurchase of two parcels of land in California. Acting on Hawaiian Interna-tional’s behalf, Pablo agreed to purchase the land. Unbeknownst to HawaiianInternational, however, Pastor also arranged to take a portion of the com-missions to be received by the seller’s brokers. Pablo did not disclose thecommissions to the directors of Hawaiian International until several monthsafter the transaction had closed.

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2.3.3 Issue

Did Pablo breach his fiduciary duty to Hawaiian International?

2.3.4 Holding

Pablo breached his fiduciary duty.

2.3.5 Reasoning

Kobayashi, Justice. The acceptance of undisclosed benefits arising froma transaction involving a corporation may amount to a breach of the fiduciaryduty owed to that corporation even if the benefits do not result in any harmto the corporation. Pablo cannot circumvent the settled law by claimingthat Hawaiian International would have been prohibited from receiving anycommissions from the sale by virtue of not being a licensed real-estate broker.A corporate officer cannot invoke ultra vires in order to obtain a share of theprofits from a transaction. Pablo should have disclosed the commission toHawaiian International so as to allow the corporation to make an informeddecision as to the purchase price.

2.4 Forkin v. Cole

548 N.E.2d 795 (Ill.App. 1989)

Squib Cole, who controlled HPDI Corporation, mortgaged the corpora-tion’s property as security for a personal loan. Although Cole argued thatthe corporation suffered no material loss, the court found that he had en-cumbered the HPDI asset.

2.5 Northeast Harbor Golf Club, Inc. v. Harris

661 A.2d 1146 (Maine 1995)

2.5.1 Overview

The Supreme Court of Maine articulated the steps that a corporate directormust take in order to avoid liability for the improper taking of a corporateopportunity.

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2.5.2 Facts

While serving as a director of Northeast Harbor Golf Club, Harris purchasedseveral parcels of land adjacent to the Golf Club’s property. Harris disclosedeach transaction to the Golf Club’s board of directors, and she stated in eachinstance that she had no particular plans to develop the land. The directorsdeclined to take any formal action in response to the purchases. When Har-ris expressed the desire to develop the land as residential subdivisions, thedirectors argued that she had breached her fiduciary duty to the Golf Clubby failing to notify the directors of the opportunity to purchase the land.

2.5.3 Issue

What must a director do to avoid liability for the improper taking of acorporate opportunity?

2.5.4 Holding

A director must at least notify the corporation of an opportunity from whichthe director might profit personally at the corporation’s expense.

2.5.5 Reasoning

Roberts, Justice. Although different courts have adopted different testsfor what constitutes a “corporate opportunity,” the basic purpose of each testis to ensure that a director does not pursue personal gain at the corporation’sexpense. As set forth in the American Law Institute’s Principles of CorporateGovernance, a director should disclose to the corporation any opportunitythat might set the director’s personal interests at odds with the interests ofthe corporation. In order to avoid liability for breaching her fiduciary duty,Harris must convince the court that she afforded the Golf Club a meaningfulopportunity to consider and reject purchasing the parcels of land at issue.

2.6 Broz v. Cellular Information Systems, Inc.

673 A.2d 148 (Del. 1996)

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2.6.1 Overview

The Delaware Supreme Court held that the director of a corporation generallyhas no obligation to disclose potential conflicts of interest to potential buyersof the corporation.

2.6.2 Facts

Broz simultaneously served as a director for two corporations. First, hewas the sole stockholder of RFB Cellular, Inc. (“RFBC”), which providedcell-phone service in the Midwest. Second, he was a director of CellularInformation Systems, Inc. (“CIS”), which was a competitor of RFBC. CISknew of Broz’s relationship to RFBC at all times.

In April 1994, Mackinac Cellular Corporation approached Broz to discussthe possibility of selling to RFBC a license that would allow RFBC to expandits coverage. Broz promptly disclosed the offer to several directors of CIS,each of whom expressed that CIS had neither the resources nor the plansto purchase such a license. After CIS made clear its lack of interest, Brozacquired the license for RFBC in November 1994.

Between April 1994 and November 1994, PriCellular, Inc. acquired CIS.PriCellular subsequently sued Broz on the ground that he had breached hisfiduciary duty to CIS by failing to consider that a potential purchaser of CISmight be interested in the license.

2.6.3 Issue

Is the director of a corporation required to disclose a potential conflict ofinterest not only to the corporation but also to parties that might have afuture interest in the corporation?

2.6.4 Holding

The director of a corporation need only disclose potential conflicts of interestto the corporation itself.

2.6.5 Reasoning

The acquisition of CIS by PriCellular was still purely speculative when Brozdisclosed the availability of the license to CIS. Broz obtained confirmation

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that CIS had no interest in purchasing the license. Trial testimony estab-lished that the entire board of CIS believed that the corporation was finan-cially incapable of making such a purchase. Having ascertained CIS’s inten-tions, Broz had no obligation to anticipate eventualities such as PriCellular’sacquisition of CIS.

2.7 In re eBay, Inc. Shareholders Litigation

2004 WL 253521 (Del. Ch. 2004)

Squib The Delaware Court of Chancery held that accepting shares thatwould otherwise be issued in an initial public offering (IPO) may amount toa breach of the fiduciary duty. During a secondary offering of eBay, GoldmanSachs issued shares of the company to the defendants. Because the price ofeBay stock skyrocketed, the defendants made immense profits on the shareswithin days or hours of receiving them. Although the court doubted that ac-cepting such shares interfered with any corporate opportunity, it nonethelessfound that the defendants’ conduct amounted to a breach of their fiduciaryduty. The court held that the defendants had an obligation to provide anaccounting of personal profits derived from transactions involving the corpo-ration.

2.8 Tyson Foods, Inc. (Tyson II)

2007 WL 2351071 (Del. Ch. 2007)

2.8.1 Overview

The Delaware Court of Chancery found that the granting of “spring-loaded”stock options may amount to a breach of the fiduciary duty. The court heldthat failure to disclose the nature of such options with sufficient particular-ity precludes the application of the business-judgment rule in reviewing theissuance of the options.

2.8.2 Facts

The directors of Tyson Foods received from the corporation “spring-loaded”stock options—options whose strike prices were so contrived as to have a

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high probability of being “in the money” immediately after issuance. Despitesignificant doubt as to whether the options complied with the terms of theTyson Stock Incentive Plan, the directors assured shareholders in vague termsthat the options were indeed permitted under the Plan.

2.8.3 Issue

Did the directors breach their fiduciary duty by failing to disclose the natureof the options with sufficient particularity?

2.8.4 Holding

The directors breached their fiduciary duty by failing to disclose the natureof their options with sufficient particularity.

2.8.5 Reasoning

Chandler, J. Directors owe to their corporation a duty of unremittingloyalty. The directors of Tyson Foods cannot fulfill this obligation by em-ploying “bare formalism concealed by a poverty of communication.” Sincethe directors breached their fiduciary duty, their conduct cannot be reviewedunder the business-judgment rule.

3 Duty of Loyalty: Controlling Shareholders

3.1 Zahn v. Transamerica Corp.

162 F.2d 36 (3d Cir. 1947)

3.1.1 Overview

The Third Circuit held that a controlling shareholder owes to minority share-holders the same fiduciary duty as that which a director would owe.

3.1.2 Facts

The Axton-Fisher Tobacco Company had issued three classes of stock: pre-ferred stock, Class A common stock, and Class B common stock. Impor-tantly, the Class A shares were callable by Axton-Fisher at $60 per share.

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Zahn owned Class A stock. Transamerica held enough Class B stock to con-trol Axton-Fisher by appointing a majority of its directors and managingAxton-Fisher’s business affairs.

Transamerica knew that Axton-Fisher owned a significant quantity oftobacco whose value had recently risen from approximately $6 million tomore than $20 million. To appropriate the value of the tobacco for itself,Transamerica caused Axton-Fisher’s board to call the Class A stock andliquidate the company. Zahn sued on the ground that the call option im-properly deprived holders of Class A stock from receiving their fair share ofthe proceeds from the liquidation.

3.1.3 Issue

(1) Did Transamerica owe a fiduciary duty to Axton-Fisher’s minority share-holders? (2) If so, did Transamerica breach that duty by depriving share-holders of the ability to participate fully in the liquidation?

3.1.4 Holding

(1) Transamerica owed a fiduciary duty to the minority shareholders. (2)Transamerica breached that duty by calling Class A stock.

3.1.5 Reasoning

Biggs, Circuit Judge. While minority shareholders may vote solely fortheir own interests, directors owe a fiduciary duty to all shareholders. Be-cause Transamerica appointed a majority of Axton-Fisher’s directors, Axton-Fisher’s board was not acting disinterestedly when it chose to liquidatethe company. Rather, a “puppet-puppeteer” relationship existed betweenTransamerica and Axton-Fisher. This relationship obligated Transamericato act not only in its own interests but also in the interests of Axton-Fisher’sshareholders.

3.2 Sinclair Oil Corp. v. Levien

280 A.2d 717 (Del. 1971)

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3.2.1 Overview

The Supreme Court of Delaware held that the intrinsic-fairness rule shouldbe used to review a parent corporation’s self-dealing transactions with a sub-sidiary. By contrast, the court held that the business-judgment rule appliesto all other parent-subsidiary dealings.

3.2.2 Facts

Sinclair Oil Corporation (“Sinclair”) wholly owned and operated SinclairVenezuelan Oil Company (“Sinven”). Between 1960 and 1966, Sinclair causedSinven to distribute dividends. During that period, Sinclair also breached acontract with Sinven. Levien sued on the ground that Sinclair had breachedits fiduciary duty to Sinven’s shareholders by distributing the dividends andbreaching the contracts.

3.2.3 Issue

(1) What standard should be applied in reviewing potentially self-interesteddealings between a parent corporation and a subsidiary? (2) Did Sinclairbreach its fiduciary duty to Sinven’s shareholders?

3.2.4 Holding

(1) A parent corporation’s potentially self-interested dealings with a sub-sidiary should be reviewed under the intrinsic-fairness standard. All otherparent-subsidiary dealings should be reviewed under the business-judgmentrule. (2) Sinclair did not breach any fiduciary duty in distributing the divi-dends, but it did breach a fiduciary duty by failing to make payments pur-suant to its contract with Sinven.

3.2.5 Reasoning

Wolcott, Chief Justice. The intrinsic-fairness rule applies to dealingsin which a parent corporation may benefit itself at the expense of the sub-sidiary’s shareholders. By contrast, the business-judgment rule applies toany parent-subsidiary dealing where such a conflict of interest cannot arise.

Levien has failed to demonstrate that the distribution of dividends bySinven benefited Sinclair at the expense of Sinven’s shareholders. While dis-

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tributing the dividends may have been imprudent in light of Sinven’s financialsituation, the only relevant consideration is that the dividends proportion-ally benefited Sinven’s shareholders. Because the dividends did not benefitSinclair at the expense of Sinven’s shareholders, no conflict of interest existed.

Levien has also failed to demonstrate that the distribution of dividendsdeprived Sinven of a corporate opportunity. Although he has alleged thatdistributing the dividends slowed Sinven’s growth, he could not point to anyparticular opportunity that Sinven lost through this course of action.

Because Levien has not shown that any conflict of interest existed betweenSinclair and Sinven, Sinclair’s conduct must be evaluated under the business-judgment rule. Since the distribution of the dividends cannot be consideredirrational, Levien cannot recover for their distribution.

By contrast, the breach-of-contract claim must be evaluated under theintrinsic-fairness standard because Sinclair’s failure to make contractual pay-ments to Sinven had the potential to benefit Sinclair at the expense of Sin-ven’s shareholders. Because Sinclair has failed to show that the delayedpayments were intrinsically fair to Sinven’s shareholders, Sinclair may beliable to Levien.

3.3 David J. Greene & Co. v. Dunhill International,Inc.

Squib Dunhill International owned Spalding, a manufacturer of sportinggoods and toys. After Dunhill acquired Child Guidance Toys, Greene suedon the ground that the acquisition was a corporate opportunity belonging toSpalding. The Chancery Court of Delaware ruled for Greene upon findingthat Spalding had a realistic prospect of acquiring Child Guidance Toys.

3.4 Kahn v. Lynch Communications Systems, Inc.

3.4.1 Overview

The Supreme Court of Delaware applied the entire-fairness rule in reviewinga transaction involving self-dealing. The court declined to shift the burden ofproving fairness to the plaintiff after finding that the approval of ostensiblydisinterested directors was defective.

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3.4.2 Facts

Alcatel U.S.A. Corporation (“Alcatel”) owned 43.3 percent of Lynch Commu-nication Systems, Inc. (“Lynch”). Alcatel itself was owned by the CompagnieGenerale d’Electricite (“CGE”). Although Alcatel was a minority shareholderof Lynch, Alcatel nonetheless exercised considerable control over Lynch bydesignating five of its eleven directors and several other important officers.

After determining that Lynch should acquire Telco Systems, Inc. (“Telco”)to safeguard its competitiveness, the directors of Lynch recommended theacquisition to Alcatel. Alcatel, however, rejected the recommendation andsuggested instead that Lynch should acquire Celwave Systems, Inc. (“Cel-wave”), an indirect subsidiary of CGE. Despite that several of Lynch’s di-rectors favored the originally proposed acquisition of Telco, Alcatel insistedthat Lynch pursue Celwave.

Lynch formed an Independent Committee to consider the acquisition ofCelwave. The Committee ultimately found the acquisition to be unfavorableand unanimously rejected the transaction. Alcatel responded by abandoningthe Celwave proposal and making an offer to purchase enough Lynch stockto become the majority shareholder of Lynch. Despite that negotiationssuggested that Lynch desired at least $17 per share, Alcatel made a finaloffer of $15.50 per share. Lynch’s board approved the transaction. Kahnsued on the ground that the price was unfairly low because Lynch’s directorscould neither act independently of Alcatel nor negotiate at arm’s length withAlcatel.

3.4.3 Issue

Did Alcatel’s control of Lynch restrain the directors of Lynch from actingindependently and negotiating at arm’s length?

3.4.4 Holding

Alcatel’s control of Lynch restrained the directors of Lynch from acting in-dependently and negotiating at arm’s length.

3.4.5 Reasoning

Holland, Justice. Although Alcatel was a minority shareholder of Lynch,it was nonetheless a controlling shareholder because it exercised substantial

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control over Lynch. Alcatel therefore faced a conflict of interest in purchasingLynch stock, so the transaction must be reviewed under the entire-fairnessstandard.

Although the approval of a self-interested transaction by independent di-rectors may shift the burden of proof to the plaintiff, the burden of provingfairness in the current case must rest with Alcatel. While it is true thatLynch’s Independent Committee formally approved the transaction, thatapproval was defective because the Committee members were not acting in-dependently in making the decision. In addition to generally dominatingLynch’s operations, Alcatel threatened to initiate a hostile takeover in theevent that Lynch turned down its offered price. Because Alcatel interferedwith Lynch’s ability to decline the transaction, it has the burden of provingthat the transaction was fair.

3.5 Levco Alternative Fund v. The Reader’s Digest As-sociation, Inc.

803 A.2d 428 (Del. 2002)

Squib The Delaware Supreme Court disapproved a recapitalization of theReader’s Digest Association that would have benefited the controlling share-holder at the expense of the minority shareholders.

3.6 In re Trados Inc. Shareholder Litigation

2009 WL 2225958 (Del.Ch. 2009)

3.6.1 Overview

The Chancery Court of Delaware held that corporate directors must prioritizethe interests of common stockholders whenever their interests conflict withthose of preferred stockholders.

3.6.2 Facts

Trados developed language-translation software. Four of its seven directors—David Scanlan, Lisa Stone, Sameer Gandhi, and Joseph Prang—were board

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designees of investment firms whose combined holdings included 51% of Tra-dos’s outstanding preferred stock. The company’s poor performance causedthe directors to contemplate merging Trados with another company. To thisend, the directors hired a new CEO, Joseph Campbell, whose task was to“grow the company profitably or sell it.”

Under Campbell’s leadership, Trados’s performance improved to the pointwhere a merger was no longer urgently needed. Despite the company’s im-proved prospects, the directors nonetheless approved a merger in which thecommon stockholders received nothing for their shares.

3.6.3 Issue

Does the directors’ decision to sell Trados support a claim for breach of thefiduciary duty?

3.6.4 Holding

The directors’ decision to sell Trados supports a claim for breach of thefiduciary duty.

3.6.5 Reasoning

Chandler, Chancellor Where the interests of common stockholders con-flict with those of preferred stockholders, corporate directors must prioritizethe interests of common stockholders. The business-judgment rule does notapply when the directors of a corporation have sufficiently material intereststhat may conflict with those of shareholders. Scanlan, Stone, Gandhi, andPrang all faced conflicts of interest because each worked for an investmentfirm that sought to maximize the value of the preferred shares. Because thesedirectors were employed by their respective firms, it is reasonable to infer thatthey could not weigh impartially the interests of the preferred stockholdersagainst those of the common stockholders.

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4 The Voting System: Allocation of Legal

Powers and Proxy Rules

4.1 Charlestown Boot & Shoe Co. v. Dunsmore

60 N.H. 85 (1880)

4.1.1 Overview

The New Hampshire Supreme Court held that shareholders may not inter-fere with the directors’ management of a corporation except to the extentpermitted by corporate bylaws.

4.1.2 Facts

The shareholders of the Charlestown Boot & Shoe Company voted to closedown the corporation and appointed Osgood, who was not affiliated withthe corporation, to oversee the conclusion of its operations. The directorsof Charlestown, however, refused to follow the shareholders’ recommendedcourse of action and declined to sell the corporation’s assets. After an unin-sured warehouse burned down, the shareholders for damages allegedly in-curred by the directors’ unwillingness to follow their recommendations.

4.1.3 Issue

Did the directors have an obligation to act in accordance with the sharehold-ers’ recommendations?

4.1.4 Holding

The directors had no obligation to act in accordance with the shareholders’recommendations.

4.1.5 Reasoning

Smith, J. The affairs of a corporation are to be managed solely by itsdirectors. Shareholders may not interfere with the directors’ decisions exceptto the extent permitted by the corporate bylaws. Shareholders may notappoint an external individual, such as Osgood, to act with the directors.

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4.2 People ex rel. Manice v. Powell

94 N.E. 634 (N.Y. 1911)

Squib The New York Court of Appeals held that corporate directors areentitled act according to their best judgment in managing the affairs of thecorporation. The court emphasized that “stockholders cannot act in relationto the ordinary business of the corporation.”

4.3 Schnell v. Chris-Craft Industries, Inc.

285 A.2d 437 (Del. 1971)

4.3.1 Overview

The Supreme Court of Delaware held that the directors of a corporation maynot change the date of a shareholder vote for the purposes of entrenchingthemselves on the board.

4.3.2 Facts

After the shareholders of Chris-Craft Industries express their intent to replacethe directors because of the corporation’s poor performance, the directorsvoted to advance the date of the annual shareholder meeting by a month.The shareholders sued on the ground that the directors changed the date ofthe meeting for the purpose of frustrating a shareholder vote on the issue ofreplacing the directors.

4.3.3 Issue

Did the directors improperly change the date of the shareholder meeting?

4.3.4 Holding

The directors improperly changed the date of the shareholder meeting.

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4.3.5 Reasoning

Herrmann, Justice (for the majority of the court): The directorschanged the date of the shareholder meeting in order to frustrate the share-holders’ efforts to organize a proxy battle. Directors may not use the cor-porate machinery in such a way as to frustrate dissident shareholders’ legit-imate attempts to exercise their voting rights. Even though the directors’actions technically fall within the boundaries of the Delaware CorporationLaw, mere compliance with the letter of the law does not validate an other-wise inequitable action.

4.4 Blasius Industries Inc. v. Atlas Corp.

564 A.2d 651 (Del.Ch. 1988)

4.4.1 Overview

The Delaware Court of Chancery held that the directors of a corporationmay not interfere with the power of shareholders to appoint a majority ofthe board. The court found that this limitation applies even if the directorsare acting in good faith and not merely to entrench themselves.

4.4.2 Facts

After acquiring 9.1% of the outstanding shares of Blasius Industries, Atlasannounced its intention to explore the possibility of acquiring control of thecompany and implementing a restructuring. Acting through a subsidiary,Atlas submitted to Blasius a “precatory resolution” indicating its intentionto expand the board from seven to fifteen members and to appoint enoughdirectors to control a majority of the new board. The directors of Blasiusresponded by adding two members to the board, thereby preventing Atlasfrom installing a majority in the proposed fifteen-member board. Atlas chal-lenged the decision on the ground that it was an improper exercise of thedirectors’ power.

4.4.3 Issue

Are the directors of a corporation prohibited from interfering with the share-holders’ ability to install a majority of the board even if they are sincerely

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acting in the corporation’s interest?

4.4.4 Holding

The directors of a corporation are prohibited from interfering with the share-holders’ ability to install a majority of the board even if they are sincerelyacting in the corporation’s interest.

4.4.5 Reasoning

Allen, Chancellor. Because the appointment of directors lies at the foun-dation of the agency relationship between shareholders and the board, thedirectors of a corporation should not have the power to take any action whoseintended effect is to entrench the incumbent directors’ control of the board.Even if the directors believe in good faith that entrenchment will serve thecorporation’s interests, they must nonetheless refrain from tampering withthe allocation of power between the board and shareholders. This restrictionprotects shareholders, who can respond to unsatisfactory management onlyby exercising their votes or selling their shares.

4.5 Condec Corp. v. Lunkenheimer Co.

43 Del.Ch. 353 (1967)

Squib The Delaware Court of Chancery held that a corporation may notresist a takeover attempt by diluting the acquiring party’s holdings by issuingnew shares.

4.6 J.I. Case Co. v. Borak

377 U.S. 426 (1964)

Squib The Supreme Court held that private parties may bring claims toenforce the SEC’s Proxy Rules. The Court found that private enforcementsupplemented the SEC’s efforts to ensure compliance with the Rules.

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4.7 Wyandotte v. United States

389 U.S. 191 (1967)

Squib The Supreme Court reaffirmed its holding in J.I. Case Co. v. Borak,377 U.S. 426 (1964), that private parties could bring claims to enforce theProxy Rules.

4.8 Cort v. Ash

422 U.S. 66 (1975)

Squib The Supreme Court established a four-factor test for determiningthe appropriateness of bringing a private action to enforce the Proxy Rules.The Court stated that courts deciding whether to allow a private actionshould consider (1) whether the plaintiff belongs to the class for whose espe-cial benefit the statute was enacted; (2) whether the statute creates a federalright in favor of the plaintiff; (3) whether a private action would be consistentwith the legislative scheme; and (4) whether the plaintiff’s cause of actionwould traditionally fall under state law or federal law.

4.9 Mills v. Electric Auto-Lite Co.

396 U.S. 375 (1970)

4.9.1 Overview

The Supreme Court held that a materially misleading proxy statement nec-essarily constitutes a cause of the subsequent shareholder action. The Courtfound that such a statement allows private enforcement of § 14(a) of theSecurities Exchange Act of 1934.

4.9.2 Facts

Mergenthaler Linotype Company was a majority shareholder of Electric Auto-Lite Company. Mergenthaler appointed eleven of Electric Auto-Lite’s direc-tors. When Mergenthaler sought to merge with Electric Auto-Lite, it issueda proxy statement that failed to mention that Mergenthaler had appointed

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the eleven directors. Mills sued on the ground that the omission of this in-formation constituted a violation of § 14(a) of the Securities Exchange Actof 1934.

4.9.3 Issue

(1) Is Mills required to show that the misleading proxy statement was a but-for cause of the merger? (2) May the fairness of a merger allow that mergerto be upheld despite inadequate disclosure?

4.9.4 Holding

(1) Mills need not show that the misleading proxy statement was a but-forcause of the merger. The misleading nature of the statement itself gives riseto a inference that the statement influenced the shareholders’ votes. (2) Thefairness of a merger does not form a defense against claims of inadequatedisclosure.

4.9.5 Reasoning

Mr. Justice Harlan delivered the opinion of the Court. The very factthat the proxy statement was misleading gives rise to the inference that thestatement affected shareholders’ votes. When a shareholder has shown thatthe disclosures contained in a proxy statement are materially defective, theshareholder need not show additionally that any of the defects had a decisiveeffect on the vote. This rule avoids the intractable difficulty of determiningjust how many votes were affected by the defective proxy statement.

The fairness of a merger does not form a defense against claims of inade-quate disclosure. Congress intended to promote the exercise of shareholders’votes in passing the Act of 1934; allowing a merger to be sustained solely bya fair outcome would defeat this purpose.

4.10 TSC Industries v. Northway, Inc.

426 U.S. 438 (1976)

Squib The Supreme Court defined what it meant for information to be“material” for the purposes of a proxy statement. The Court stated that “an

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omitted fact is material if there is a substantial likelihood that a reasonableshareholder would consider it important in deciding how to vote.” The Courtfurther stated that a material fact is one which would alter the “total mix”of information available to a reasonable investor.

4.11 Virginia Bankshares, Inc. v. Sandberg

501 U.S. 1083 (1991)

4.11.1 Overview

4.11.2 Facts

First American Bankshares, Inc. (“FABI”) wholly owned Virginia Bankshares,Inc. (“VBI”). FABI pursued a transaction in which First American Bank ofVirginia (“Bank”) would merge with VBI. FABI issued a proxy solicitationindicating that $42 per share was a “fair” price for the Bank even thoughcircumstances suggested that the Bank was worth at least $60 per share.Sandberg sued on the ground that FABI’s conclusory regarding the Bank’svalue violated § 14(a) of the Securities Exchange Act of 1934.

4.11.3 Issue

(1) Can conclusory or qualitative statements be materially misleading for thepurposes of § 14(a)? (2) Can undisclosed beliefs of directors support liabilityunder § 14(a)?

4.11.4 Holding

(1) Conclusory or qualitative statements can be materially misleading forthe purposes of § 14(a). (2) Undisclosed beliefs of directors cannot supportliabiliy under § 14(a).

4.11.5 Reasoning

Justice Souter delivered the opinion of the Court. Because directorstypically know much more about a corporation than shareholders, directors’statements evaluations of potential transactions can be material to the extentthat shareholders rely on their expertise. Furthermore,

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4.12 Rosenfeld v. Fairchild Engine & Airplane Corp.

309 N.Y. 168 (1955)

4.12.1 Overview

The New York Court of Appeals held that a corporation may reimbursecurrent and former directors for the expense of a proxy contest as long asthe contest was not waged for the purpose of securing a personal interest incontrolling the corporation.

4.12.2 Facts

After control of Fairchild Engine and Airplane changed hands following aproxy contest, the new directors voted to provide $28,000 to the formerdirectors for expenses incurred in defending against the contest. Shareholdersvoted to provide $127,000 to the new directors for their expenses in bringingthe contest. As a shareholder, Rosenfeld sued the corporation on the theorythat such compensation was improper.

4.12.3 Issue

May a corporation compensate the parties to a proxy contest for the expensesthey incurred during the contest?

4.12.4 Holding

A corporation may compensate the parties to a proxy contest for the expensesthey incurred during the contest.

4.12.5 Reasoning

Frossel, Judge. Directors must have the means to resist those who at-tempt to seize control of their corporation. Otherwise, the directors wouldbe at the mercy of any party with sufficient funds to initiate a takeover ofthe company. As long as the parties wage the contest over genuine issues ofpolicy as opposed to the desire for personal power, the corporation shouldbe allowed to compensate both parties for the expenses they incur.

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Desmond, Judge (concurring). The court should consider the specificnature of the expenses incurred by each party to the proxy contest. The courtshould exclude from reimbursement those expenses relating to “proceedingsby one faction in its contest with another for the control of the corporation.”

Van Voorhis, Judge (dissenting). The former directors expended fundsfor purposes

5 Transactions in Control

5.1 Zetlin v. Hanson Holdings, Inc.

48 N.Y.2d 684 (1979)

5.1.1 Overview

The New York Court of Appeals held that a controlling shareholder maygenerally sell its shares at a premium.

5.1.2 Facts

The controlling shareholders of Gable Industries, Inc. sold their 44.4% stakein the company at $15 per share when the market price of Gable Industriesstock was only $7.38 per share. Zetlin sued on the ground that the sellersshould not have charged a premium for their controlling stake.

5.1.3 Issue

May the controlling shareholders of a corporation sell their shares at a pre-mium?

5.1.4 Holding

The controlling shareholders of a corporation may sell their shares at a pre-mium.

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5.1.5 Reasoning

Since the controlling shareholders have invested the resources necessary toobtain control of the corporation, they should have the ability to charge apremium for the controlling stake. Absent corporate looting or other actsof bad faith, minority shareholders are not entitled to protection against theinterests of the majority.

5.2 Gerdes v. Reynolds

28 N.Y.2d 622 (1941)

5.2.1 Overview

The New York Court of Appeals held that controlling shareholders may notsell their controlling stake to a corporate looter for the purpose of realizingpersonal gains.

5.2.2 Facts

The controlling shareholders of Reynolds Investment Company, Inc. sold theirshares of the corporation at an immense premium. Although valuations ofthe company ranged from 5 cents per share to 50 cents per share, the control-ling shareholders received $2 per share. As part of the sale, the controllingshareholders appointed to the board individuals designated by the buyer.The company’s assets consisted substantially of holdings in other companies,and the buyer began “converting [the] securities to its own use” immediatelyupon completion of the sale. The minority shareholders sued on the groundthat the controlling shareholders had breached their fiduciary duty by sellingtheir stake to a corporate looter.

5.2.3 Issue

(1) Did the controlling shareholders have an obligation to investigate thebuyer? (2) Did the sale price reflect payment for the appointment of thebuyer’s designees to the board?

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5.2.4 Holding

(1) The controlling shareholders had an obligation to investigate the buyer.(2) The sale price reflected payment for the appointment of the buyer’s de-signees to the board.

5.2.5 Reasoning

Walter, Justice . . . . Corporate directors may not relinquish control oftheir corporation under conditions that would leave the corporation’s assetswithout proper care or protection. Although the controlling shareholders ofReynolds Investment Company had no knowledge that the buyer planned toloot the corporation, the circumstances of the sale should have alerted themto this possibility. The price paid for the company grossly exceeded its marketvalue. The company’s particular combination of holdings was unremarkableand easily duplicable. A reasonable investor could do just as well, if notbetter, by buying similar securities directly from the market. Furthermore,the transaction left the buyer in a position to pay for the company by sellingthe company’s assets. These circumstances raise a strong inference that thebuyer was in fact a corporate looter. The facts compel the conclusion thatthe sale price included not only the value of the shares but also payment forappointment of the buyer’s designees to the board.

5.3 Perlman v. Feldmann

219 F.2d 173 (2d Cir. 1955)

5.3.1 Overview

The Second Circuit held that the controlling shareholders of a corporationmisappropriated a corporate opportunity by selling their stake to the corpo-ration’s customers.

5.3.2 Facts

C. Russell Feldmann and members of his family were the controlling share-holders of Newport Steel Corporation. Owing to steel shortages caused bythe Korean War, the company had sufficient bargaining power to implementthe “Feldmann Plan.” Under the Plan, purchasers of steel gave interest-free

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advances to Newport in return for claims to Newport’s steel output. Ratherthan continuing to do business under the Plan, the controlling shareholdersdecided to sell their stake to steel consumers. The sellers were paid $20 pershare, which represented a significant premium over a market price that hadnot exceeded $12. The minority shareholders then sued on the ground thatFeldmann and his family had improperly deprived Newport of the opportu-nity to continue operating under the Feldmann Plan.

5.3.3 Issue

Did the controlling shareholders of Newport improperly appropriate for them-selves benefits that might have accrued to the corporation?

5.3.4 Holding

The controlling shareholders of Newport improperly appropriated for them-selves benefits that might have accrued to the corporation.

5.3.5 Reasoning

Clark, Chief Judge. Controlling shareholders breach the fiduciary dutywhen they “siphon[ ] off for personal gain corporate advantages to be derivedfrom a favorable market situation.” By selling control of the company tosteel consumers, Feldmann and his family members deprived Newport of theopportunity to continue reaping benefits under the Feldmann Plan. Anypremium that steel consumers would have paid to Newport for the scarcesteel were instead directed to the controlling shareholders in the form of acontrol premium.

5.4 Brecher v. Gregg

392 N.Y.S.2d 776 (1975)

5.4.1 Overview

The New York Supreme Court found that some blocks of shares are too smallto be considered controlling blocks.

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5.4.2 Facts

Gregg owned 82,000 shares of Lin Broadcasting Corporation (“LIN”). Hisholdings amounted to 4% of LIN’s outstanding stock. When Gregg sold theshares to the Saturday Evening Post Company (“SEPCO”), he received aprice of $3.5 million, which represented a premium of $1.26 million over themarket price. As part of the sale, Gregg resigned from his post as president ofLIN and agreed to ensure that SEPCO’s designees would occupy a majorityof the board. LIN’s shareholders sued on the ground that Gregg improperlysold his control of the company.

5.4.3 Issue

Did Gregg improperly sell control of the company?

5.4.4 Holding

Gregg improperly sold control of the company.

5.4.5 Reasoning

Norman L. Harvey, J. As a matter of law, a 4% stake in a corporationcannot be considered holdings sufficient to warrant a control premium.

5.5 Essex Universal Corp. v. Yates

305 F.2d 572 (2d Cir. 1972)

5.5.1 Overview

The Second Circuit held that the seller of a 28.3% stake in a corporationmay agree to replace existing directors with the buyer’s designees.

5.5.2 Facts

Yates, the president and chairman of Republic Pictures Corporation, agreedto sell 28.3% of the company’s outstanding shares to Essex Universal Cor-poration. The terms of the sale specified that Yates would grant Essex theoption to replace a majority of Republic’s board with its own designees. Thisprovision overrode bylaws providing that only a third of the directors could

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be replaced at each annual meeting. When Yates terminated the transactionafter finding Essex’s method of payment to be inadequate, Essex sued fordamages. In response, Yates argued that the transaction was void becausethe option amounted to an unlawful sale of control.

5.5.3 Issue

Did Essex’s option to appoint immediately a majority of the board create anunlawful sale of control?

5.5.4 Holding

Essex’s option to appoint immediately a majority of the board did not createan unlawful sale of control.

5.5.5 Reasoning

Lumbard, Chief Judge. For all practical purposes, the 28.3% stake thatYates sold to Essex is sufficiently large to represent a controlling stake inthe corporation. Since Yates sold a controlling stake in Republic, Essex wasentitled to ask for the power to appoint a majority of the board immediatelyupon completion of the sale. The contrary rule would tend to frustrate thetransfer of corporate control from seller to buyer. If Yates continues to pursuethis argument, he must carry the burden of showing that the option wouldhave frustrated the efforts of some contingent of shareholders to appoint theirown directors.

Friendly, Circuit Judge (concurring). Provisions that allow a buyer tocircumvent the normal constraints on appointments of directors tend to inter-fere with shareholders’ ability to appoint directors through their own votes.For this reason, provisions such as Essex’s option should be enforced onlyif the buyer has purchased more than half of the corporation’s outstandingstock, so that the election of directors would be a mere formality.

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6 Mergers and Acquisitions: The Legal and

Business Structure

6.1 Hollinger, Inc. v. Hollinger International, Inc.

858 A.2d 342 (Del.Ch. 2004)

6.1.1 Overview

The Delaware Court of Chancery applied the Gimble test to determine whethera corporation was selling “substantially all” of its assets.

6.1.2 Facts

Hollinger International (“International”) owned Telegraph Group Ltd. (“Tele-graph”) through a series of subsidiaries that included Hollinger (“Inc.”).When International directed Inc. to sell Telegraph to Press Holdings Interna-tional, Inc. sued to enjoin the sale on the ground that International had failedto obtain shareholder approval for a transaction disposing of “substantiallyall” of International’s assets.

6.1.3 Issue

Does the sale amount to a disposition of “substantially all” of International’sassets?

6.1.4 Holding

The does not amount to a disposition of “substantially all” of International’sassets.

6.1.5 Reasoning

Strine, Vice Chancellor . . . . Delaware law requires a corporation toobtain shareholder approval for any sale disposing of “substantially all” of thecorporation’s assets. Under the Gimble test, a corporation disposes of “sub-stantially all” of its assets when it engages in a sale “of assets quantitativelyvital to the operation of the corporation and [which] is out of the ordinaryand substantially affects the existence and purpose of the corporation.”

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International is not disposing of “substantially all” of its assets by sellingTelegraph. Although Telegraph accounts for 56–57% of International’s assetvalue, International also owns the Chicago Group, which accounts for 43-44%of its value. The sale of Telegraph would leave International with an appre-ciable fraction of its current assets. The sale also would not “substantiallyaffect[ ] the existence and purpose of the corporation” since Internationalwould continue to own and operate newspapers.

While International’s chain of subsidiaries would ordinarily insulate itfrom liability, International’s willingness to contract directly with Press Hold-ings suggests that courts should have the power to hold International respon-sible for a transaction in which its subsidiaries are simply acting at its behest.

6.2 Hariton v. Arco Electronics, Inc.

41 Del.Ch. 74 (1963)

6.2.1 Overview

The Delaware Court of Chancery approved a de facto merger accomplishedthrough a sale of assets.

6.2.2 Facts

Arco Electronics and Loral combined with each other in a de facto merger. Inthe transaction, Arco sold its assets to Loral in exchange for Loral stock. Al-though a majority of Arco’s shareholders approved the transaction, dissentingshareholders sued on the ground that Arco had improperly circumvented themerger statute and thereby deprived shareholders of the right to appraisal ofthe assets.

6.2.3 Issue

Did Arco improperly circumvent the merger statute and thereby deprive itsshareholders of the right to an appraisal of its assets?

6.2.4 Holding

Arco did not improperly circumvent the merger statute and thereby depriveits shareholders of the right to an appraisal of its assets.

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6.2.5 Reasoning

Southerland, Chief Justice: Sections 271 and 275 of the Delaware Gen-eral Corporation Law may be applied simultaneously to bring about a defacto merger.

6.3 Heilbrunn v. Sun Chemical Corp.

150 A.2d 755 (Del.Ch. 1959)

Squib The Delaware Court of Chancery approved the use of a stock-for-assets merger in which the minority shareholders of the acquired corporationcould not vote against the merger.

6.4 Farris v. Glen Alden Corp.

393 Pa. 427 (1958)

6.4.1 Overview

The Supreme Court of Pennsylvania disapproved a de facto merger.

6.4.2 Facts

After operating at a loss for several years, Glen Alden Corporation sold itselfto List Industries Corporations. In order to take advantage of Glen Alden’sloss carryovers for taxes and carry out the sale under Pennsylvania law, thetransaction was structured as an “upside-down” acquisition in which GlenAlden acted as the nominal buyer. Although a majority of Glen Alden’sshareholders approved the sale, dissenting shareholders sued on the groundthat Glen Alden had improperly deprived them of the right to an appraisalof their shares.

6.4.3 Issue

Did Glen Alden improperly deprive its minority shareholders of the right toan appraisal of their shares?

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6.4.4 Holding

Glen Alden improperly deprived its minority shareholders of the right to anappraisal of their shares.

6.4.5 Reasoning

Cohen, Justice. As efforts to circumvent legal constraints have generatedincreasingly complex corporate transactions, the substance—rather than theform—of a transaction should dictate which rules apply. The “reorganiza-tion” has fundamentally altered Glen Alden. The de facto merger has con-verted Glen Alden from a mining company into a diversified holding company.The merger has also significantly changed Glen Alden’s capital structure, sothat former shareholders of Glen Alden now own shares of a corporationthat is leveraged to a much greater extent than Glen Alden. The mergerhas forced Glen Alden’s shareholders to exchange their shares for unwantedshares in a new corporation.

6.5 Rath v. Rath Packing Co.

136 N.W.2d 410 (Iowa 1965)

Squib The Iowa Supreme Court disapproved an attempt to circumventshareholders’ voting rights by implementing a de facto merger instead of astatutory merger. Rath Packing Company arranged to acquire NeedhamPacking by issuing stock in exchange for Needham’s assets. Although 60%of Rath’s shareholders approved the transaction, the approval fell below thetwo-thirds supermajority required under Iowa law. Emphasizing the sub-stance of the transaction, the court found that allowing the transaction would“amount[ ] to judicial repeal of the merger [statute].”

6.6 Terry v. Penn Central Corp.

668 F.2d 188 (3d Cir. 1981)

6.6.1 Overview

The Third Circuit approved a triangular merger.

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6.6.2 Facts

Penn Central sought to acquire Colt Industries, Inc. (“Colt”) through a tri-angular merger in which Colt would be purchased by a subsidiary of PennCentral. Former shareholders of Colt sued on the ground that the mergerimproperly deprived them of their ability to vote on the transaction and theirappraisal rights. Penn Central subsequently abandoned the purchase of Colt,but it continued to pursue similar mergers with other companies.

6.6.3 Issue

Would the triangular merger with Colt have improperly deprived Colt’sshareholders of their voting rights and appraisal rights?

6.6.4 Holding

The triangular merger with Colt would not have improperly deprived Colt’sshareholders of their voting rights and appraisal rights.

6.6.5 Reasoning

Adams, Circuit Judge. Under section 311 of the Pennsylvania BusinessCorporation Law (“PBCL”), Colt’s shareholders would have voting and ap-praisal rights only if they would have acquired enough shares of Penn Centralto elect a majority of Penn Central’s board. Section 908 of the PBCL statesthat voting and appraisal rights exist only if the transaction would create asingle corporation. Since Penn Central’s acquisition of Colt would not havefallen within the scope of either section, Colt’s shareholders could not haveinvoked voting or appraisal rights.

7 Mergers and Acquisitions: Freeze-outs and

the Appraisal Right

7.1 Leader v. Hycor, Inc.

395 Mass. 215 (1985)

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Squib The Massachusetts Supreme Court approved the “block method” ofstock valuation.

7.2 MT Properties, Inc. v. CMC Real Estate Corp.

481 N.W.2d 383 (Minn.App. 1992)

Squib The Minnesota Court of Appeals disapproved the use of “minoritydiscounts” in appraising shares held by minority shareholders.

7.3 Weinberger v. UOP, Inc.

457 A.2d 701 (Del. 1983)

7.3.1 Overview

7.3.2 Facts

7.3.3 Issue

7.3.4 Holding

7.3.5 Reasoning

7.4 Glassman v. Unocal Exploration Corp.

777 A.2d 242 (Del. 2001)

7.4.1 Overview

The Delaware Supreme Court held that appraisal is the only remedy forminority shareholders who object to a short-form merger.

7.4.2 Facts

Unocal Corporation owned a 96% stake in Unocal Exploration Corporation(“UXC”). After several years of low revenues and earnings, Unocal decidedthat acquiring the remaining 4% of UXC stock would allow Unocal to savemoney. When Unocal initiated a short-form merger with UXC, minorityshareholders of UXC sued on the ground that Unocal and its directors had

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breached their fiduciary duty by failing to show that the transaction wasentirely fair.

7.4.3 Issue

May Unocal proceed in a short-form merger with UXC without showing thatthe transaction is entirely fair?

7.4.4 Holding

Unocal may proceed in a short-form merger with UXC without showing thatthe transaction is entirely fair.

7.4.5 Reasoning

Berger, Justice. Since the entire point of a short-form merger is to sparecorporations from the process of establishing entire fairness, minority share-holders who object to a short-form merger can request only request appraisalof their shares.

7.5 Solomon v. Pathe

672 A.2d 35 (Del. 1996)

7.5.1 Overview

The Delaware Supreme Court held that a purchasing corporation in a short-form merger owes no fiduciary duty to the minority shareholders of the cor-poration being acquired.

7.5.2 Facts

Credit Lyonnais Banque Nederland N.V. (“CBLN”) owned 98% of PatheCommunications Corporation. When CBLN made a public tender offer topurchase the remaining 2% of Pathe at $1.50 per share, minority shareholdersof Pathe sued on the ground that CBLN had breached its fiduciary duty toPathe’s shareholders by making a “coercive” offer for Pathe.

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7.5.3 Issue

Did CBLN breach a fiduciary duty to Pathe’s shareholders?

7.5.4 Holding

CBLN did not breach a fiduciary duty to Pathe’s shareholders.

7.5.5 Reasoning

Harnett, Justice. Absent coercion or incomplete disclosure of the termsof the transaction, the purchasing corporation owes no fiduciary duty to theminority shareholders of the acquired corporation.

7.6 Coggins v. New England Patriots Football Club,Inc.

397 Mass. 525 (1986)

Squib The Massachusetts Supreme Court held that a purchasing corpo-ration in a short-form merger must justify the transaction using a businesspurpose. According to the court, the lack of a business purpose may signifythat the controlling shareholder is ousting the minority for selfish purposes.

7.7 Alpert v. 28 Williams Street Corp.

63 N.Y.2d 557 (1984)

Squib The New York Court of Appeals held that a corporation may not ef-fect a short-form merger unless the merger would result in the “advancementof a general corporate interest.”

8 Public Contests for Corporate Control: Part

1

8.1 Unocal Corp. v. Mesa Petroleum Co.

493 A.2d 946 (Del. 1985)

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8.1.1 Overview

The Delaware Supreme Court approved selective self-tendering as a defensivemeasure against hostile takeovers.

8.1.2 Facts

Mesa Petroleum Company, which owned 13% stake in Unocal Corporation,decided to acquire an additional 37% of Unocal’s stock and thereby gaincontrol of Unocal. To this end, Mesa initiated a two-tiered tender offer. The“front-loaded” first tier gave Unocal’s shareholders the choice to tender theirstock at $54 per share even though the market value of the stock was morethan $60 per share. At the second tier, any shareholders who declined totender at the first tier would be forced to exchange their holdings for junkbonds worth no more than $45 per share.

To counteract Mesa’s pressure to tender, Unocal’s directors announcedthat Unocal would immediately commit to purchasing 29% of its non-Mesa-owned shares at $72 per share. By artificially raising the price of the 29%stake, Unocal effectively lowered the value of the shares that Mesa intendedto purchase. Mesa sued on the ground that Unocal’s directors had misusedtheir power in making the self-tender.

8.1.3 Issue

May a corporation use selective self-tendering as a defense against hostiletakeovers?

8.1.4 Holding

A corporation may use selective self-tendering as a defense against hostiletakeovers.

8.1.5 Reasoning

Moore, Justice. Corporate directors have broad discretion in protectingthe interests of their corporation. Their discretion extends to defending thecorporation against hostile takeovers. Although self-tendering raises the pos-sibility of unfair self-dealing, directors may avail themselves of the business-

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judgment rule as long as they are making a reasonable response to a genuinethreat.

Since a majority of Unocal’s independent directors approved the self-tender, the self-tender was a product of “good faith and reasonable inves-tigation.” The self-tender was also reasonable in light of the threat sinceMesa was attempting to force Unocal’s shareholders to sell their shares forsignificantly less than their value.

8.2 Moran v. Household International, Inc.

500 A.2d 1346 (Del. 1985)

8.2.1 Overview

The Delaware Supreme Court applied the business-judgment rule in review-ing the use of a “poison pill.”

8.2.2 Facts

The directors of Household International adopted the Rights Plan, a “flip-over poison pill” designed to discourage hostile takeovers. Under the Plan,Household’s shareholders automatically acquired the option to buy at a 50%discount shares of any corporation that successfully gained control of House-hold in a hostile takeover. Moran challenged the directors’ authority to adoptthe Plan.

8.2.3 Issue

Should the adoption of the Plan be reviewed under the business-judgmentrule?

8.2.4 Holding

The adoption of the Plan should be reviewed under the business-judgmentrule.

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8.2.5 Reasoning

McNeilly, Justice. Since the Plan is designed to facilitate the exerciseof business judgment by forestalling situations in which a hostile takeovermay force the directors to make a hasty decision, the adoption of the Planshould be reviewed under the business-judgment rule. The Delaware GeneralCorporation Law contains no restrictions on the creation of poison pills. Fur-thermore, poison pills tend to incur fewer costs than other means of wardingoff hostile takeovers. The Plan does not preclude Household’s sharehold-ers from accepting a hostile tender offer, as certain maneuvers can allow adetermined purchaser can overcome the Plan. Finally, fiduciary duties con-strain the use of the Plan, as Household’s directors may not use the Plan tofrustrate a transaction that would benefit shareholders.

8.3 Carmody v. Toll Brothers

8.4 Revlon, Inc. v. MacAndrews & Forbes Holdings,Inc.

506 A.2d 173 (Del. 1985)

8.4.1 Overview

The Delaware Supreme Court held that corporate directors breached theirduty of loyalty by placing the interests of noteholders before those of share-holders and frustrating an auction when the sale of the company was in-evitable.

8.4.2 Facts

Revlon was facing the possibility of a hostile takeover by Pantry Pride. AfterRevlon rejected Pantry Pride’s initial offer of $40–50 per share, Pantry Prideprepared to make a hostile tender offer at $45 per share. Revlon defendeditself by adopting a Note Purchase Rights Plan, which allowed Revlon’s share-holders to exchange their shares for notes with a face value of $65. In effect,the Plan was a poison pill that diluted Revlon’s stock. When Pantry Pridesubsequently raised its bid to $47.50 per share, Revlon again allowed share-holders to exchange their shares for notes. The notes issued in the secondexchange, however, contained “poison debt” provisions that would prevent

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Revlon from taking on additional debt. The purpose of the poison debt wasto make it difficult for Pantry Pride to finance the takeover by borrowingmoney in Revlon’s name. In response, Pantry Pride raised its bid to $53 pershare.

While Pantry Pride’s bidding unfolded, Revlon explored the possibilityof selling itself to Forstmann. Revlon eventually agreed to a merger withForstmann at $56 per share, with Revlon waiving the “poison debt” provi-sions of its notes. The waiver, however, caused the value of the notes to drop,prompting Revlon’s directors to worry about the possibility of being sued forthe drop.

To protect the value of the notes, Revlon convinced Forstmann to sup-port the value of the notes through a note exchange. In return, Forstmannobtained a lock-up option to purchase two of Revlon’s divisions and Revlon’sagreement to a no-shop provision. Although Pantry Pride raised its bid to$56.25

8.4.3 Issue

8.4.4 Holding

8.4.5 Reasoning

8.5 Barkan v. Amsted

9 Public Contests for Corporate Control: Part

2

9.1 Paramount Communications, Inc. v. QVC Net-work

637 A.2d 34 (Del. 1994)

9.1.1 Overview

The Delaware Supreme Court held that the Revlon duties are triggered whena merger causes the dispersed holdings of the acquired corporation to betransferred to a controlling shareholder.

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9.1.2 Facts

9.1.3 Issue

9.1.4 Holding

9.1.5 Reasoning

10 Miscellaneous Cases

10.1 Emerald Partners v. Berlin

726 A.2d 1215 (Del. 1999)

Squib The Delaware Supreme Court held that the party invoking the pro-tection of § 102(b)(7) of the Delaware General Corporation Law bears theburden of proving that it acted in good faith.

10.2 Pure Resources, Inc. Shareholders Litigation

808 A.2d 421 (Del.Ch. 2002)

Squib The Delaware Court of Chancery disapproved an attempt to acquirea corporation through a coercive tender offer. Unocal already owned 65%of Pure Resources and made a tender offer for the remaining 35%. Thetender offer was contingent upon the tendering of a majority of the non-Unocal-owned shares of Pure Resources. The court found the condition tobe coercive because the minority shareholders of Pure Resources includeddirectors and officers of Unocal as well as managers of Pure Resources, whostood to benefit from severance packages upon the completion of a mergerwith Unocal.

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