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spring 2019 archive

Spring 2019 materials

Week 15: April 22-25 On Tuesday we can think about questions you may have. And last week I suggested we could look at the 2008 exam but we didn’t get to it. I also think we could look at the 2018 exam which is much closer in time to where we are now. Although the exam was set for a class using a different book almost all of the issues in the question are issues that can be addressed using the cases we studied.

There will be a review session on Thursday April 25 from 12.00 noon to 2.00pm in A 110.

Statutes: Mostly I think we studied statutes through the cases this semester, so I am not giving you a long separate list of statutes. However, do focus on RUPA §202, 404 (or 409 of UPA 2013 see CB p 107-8), 103 (section 105 of UPA 2013), and, with respect to LLCs, Fl. Stats §605.0603


  1. form and substance
  2. control (agency; controlling stockholders; independence of directors; veil piercing)
  3. corporate social responsibility
  4. contracting and fiduciary duties
  5. courts (and legislators) reacting to changing social and technological conditions (e.g. Smith v Van Gorkom; e-bay case; initial coin offerings)
  6. fuzzy rules
  7. whether litigation is an effective mechanism for policing the behavior of corporate directors and officers.

Have a good weekend.

Week 14: April 15-19 We will be spending this week reviewing the material we have studied during the semester and applying what we have learned to some hypothetical questions. On Tuesday I will say a few words about the final exam and we will discuss questions you have.

Here is a Hypo to think about that we can discuss on Tuesday, as well as the 2005 exam.

This week we can also consider the exams from 2006, 2007, and 2008 (except that parts of question 5 involve material not in our book).

Week 13- April 8-12 We will not be meeting for class this week. The following week we will be focusing on review. If you have questions about the course material you want to ask me as you begin to review next week please email me with questions, or email me to set up an appointment. I will be available after 3.30pm each day next week (except that I have a 5.30 appointment Wednesday).

If you want to think about applying the material to a set of hypothetical facts you could look at my Fall 2005 exam. The world has changed a bit since 2005, but you could answer almost all of this question based on the material we studied.

Week 12: April 1-5 On Tuesday we will begin with questions you may have about O’Hagan, and focus on the notes after the case in the book (pp 499-502). For Tuesday’s class please read Lorenzo v SEC (US Supreme Court 2019) and the SEC’s complaint against Volkswagen.

For Wednesday please read pages 502-526 of the Casebook. For Thursday please read this Complaint in Morrison v Berry.

Arkansas Teachers Retirement System v. Goldman Sachs Group, Inc.: in this case Goldman Sachs is attempting to rebut the fraud on the market presumption by showing that stock in Goldman Sachs did not increase in price in response to statements about Goldman Sachs’ efforts to avoid conflicts of interest , and that there was no price decrease in reaction to a number of press reports about the firm’s conflicts of interests relating to 4 transactions plaintiffs identified. The 2nd Circuit held in 2018 that the defendants have the burden of rebutting the presumption by a preponderance of the evidence. On remand the District Court said Goldman Sachs had failed to do so, and defendants are now appealing this decision to the 2nd. Circuit.

This week I mentioned a couple of recent court decisions:

Singh v Cigna Corp (2nd. Cir,. 2019):

This case presents us with a creative attempt to recast corporate mismanagement as securities fraud. The attempt relies on a simple equation: first, point to banal and vague corporate statements affirming the importance of regulatory compliance; next, point to significant regulatory violations; and voila, you have alleged a prima facie case of securities fraud! The problem with this equation, however, is that such generic statements do not invite reasonable reliance. They are not, therefore, materially misleading, and so cannot form the basis of a fraud case…. Like the District Court, we think that the statements in Cigna’s Code of Ethics are a textbook example of “puffery.” We have observed that “general statements about reputation, integrity, and compliance with ethical norms are inactionable ‘puffery,’ meaning that they are too general to cause a reasonable investor to rely upon them.” The Code of Ethics statements, which amount to general declarations about the importance of acting lawfully and with integrity, fall squarely within this category…. In the past, when we have found that descriptions of compliance efforts amounted to actionable assurances of actual compliance, the descriptions of such efforts were far more detailed. For example, in Meyer v. Jinkosolar… we emphasized that the company described its compliance mechanisms in confident detail, including references to 24‐hour monitoring teams, specific compliance equipment, and its clean compliance record…. Because the challenged statements are tentative and generic, and because they emphasize the complex, evolving regulatory environment that Cigna faced, we conclude that Plaintiffs have failed to plausibly allege that a reasonable investor would view these statements “as having significantly altered the total mix of information made available.” These statements are not, therefore, materially misleading.

We will not be having class during the week of April 8th. The following week we will be focusing on review. I will provide some hypotheticals for us to focus on, and if you have issues/questions you would like to review please let me know.

Week 11: March 25-29 We will begin on Tuesday with Halliburton and the fraud on the market theory, and please read to page 464. For Wednesday’s class please read to page 483 and for Thursday to page 502.

With respect to the hypo on page 443 of the Casebook, here’s an outline of a similar situation, from SEC v Koskot Interplanetary (5th Cir. 1974):

Koscot thrives by enticing prospective investors to participate in its enterprise, holding out as a lure the expectation of galactic profits. All too often, the beguiled investors are disappointed by paltry returns… The vehicle for the lure is a multi-level network of independent distributors, purportedly engaged in the business of selling a line of cosmetics. At the lowest level is a “beauty advisor” whose income is derived solely from retail sales of Koscot products made available at a discount, customarily of 45%. Those desirous of ascending the ladder of the Koscot enterprise may also participate on a second level, that of supervisor or retail manager. For an investment of $1,000, a supervisor receives cosmetics at a greater discount from retail price, typically 55%, to be sold either directly to the public or to be held for wholesale distribution to the beauty advisors. In addition, a supervisor who introduces a prospect to the Koscot program with whom a sale is ultimately consummated receives $600 of the $1,000 paid to Koscot. The loftiest position in the multilevel scheme is that of distributor.

The investment of money aspect of the arrangement is less clear in the hypo than in this case. The 5th Circuit in the case looked at the the efforts of others component of the Howey test and said:

the critical determinant of the success of the Koscot Enterprise lies with the luring effect of the opportunity meetings. As was noted earlier, investors are cautioned to employ the “curiosity approach” in attracting prospects. Once attendance is secured, the sales format devised by Koscot is thrust upon the prospect. An investor’s sole contribution in following the script is a nominal one. Without the scenario created by the Opportunity Meetings and Go-Tours, an investor would invariably be powerless to realize any return on his investment.

Week 10: March 18-22: I assigned too much material for week 8 so on Tuesday we will begin with special litigation committees. Please read to page 410 for Tuesday. Please read to page 444 for Wednesday and to page 464 for Thursday.

I said I would provide some information about the final exam for this semester, as I changed the course book this semester. I took a look at last year’s exam, and it is not very different from an exam I might write now. We haven’t yet covered some of the issues raised there, and there would be some differences of emphasis this semester (we haven’t seen cases on corporate officers’ authority, we haven’t discussed Wynn Resorts and we haven’t yet focused in as much detail as we did last spring on the control issues). But overall the exam is the sort of exam I could write now.

With respect to the 2016 exam, the material I was looking for in answers to question 2 and question 3 were a bit different from some of the material we have studied. But question 1 would be a question I could ask now, and question 4 is pretty fair, I think.

In Spring 2014 I used the same book we are using. It was an earlier edition, and there have been some changes since that edition, but except for a reorganization of the derivative litigation material so it is covered later in the book than it used to be, and for the inclusion of some more recent cases, there isn’t a great difference.

Week 9: March 11-15: Spring Break. I hope you all have a good break.

Week 8: March 4-8 This week we will not have class on Tuesday, March 5th.  On Wednesday we will begin with Stone v Ritter. Please read to page 380 for Wednesday and please also read In re Oracle Corporation Derivative Litigation (Del. Ch. March 19, 2018) . For Thursday please read to page 410.

With respect to litigation over directors’ duties to monitor, a settlement in In Re Wells Fargo & Co Shareholder Derivative Litigation has just been announced. This is derivative litigation arising out of the unapproved accounts Wells Fargo employees set up for WF customers (allegations were that current and former officers and directors of Wells Fargo knew or consciously disregarded that Wells Fargo’s employees were illicitly creating millions of customer accounts without those customers’ knowledge or consent, thereby breaching their fiduciary duties to Wells Fargo). The announcement of the settlement states:

The benefits to Wells Fargo of the proposed Settlement include (i) monetary consideration of $240 million paid to Wells Fargo from its insurers, which is the largest insurer-funded cash recovery of any settlement in a shareholder derivative action; (ii) agreement and acknowledgement that facts alleged in the Derivative Action were a significant factor in causing certain corporate governance changes undertaken by Wells Fargo during the pendency of the Derivative Action, which include improvement to Wells Fargo’s internal controls, internal reporting, and expanded and enhanced oversight of risk management by the Board of Directors (the “Corporate Governance Reforms”); and (iii) agreement and acknowledgement that facts alleged in the Derivative Action were a significant factor in causing certain remedial steps with respect to compensation reductions and forfeitures undertaken by Wells Fargo during the pendency of the Derivative Action (the “Clawbacks”). As part of the Settlement, the parties agreed that the Corporate Governance Reforms and the Clawbacks have a value to Wells Fargo of $80 million, for a total Settlement value to Wells Fargo of $320 million.

In the Medtronic case on page 360 of the Casebook there is a reference to the Tooley test for distinguishing between direct and derivative claims: Who suffered the harm? Who gets the benefit of any remedy?)

Here are some examples of derivative suits: Kamin v Amex (dividend policy rather than a shareholder’s claim to be entitled to dividends), Shlensky v Wrigley, Walt Disney, Stone V Ritter.
A corporate opportunities case would be a derivative claim if brought by a shareholder, but whereas E-bay is a derivative claim, Broz is a case brought after a change in control of the corporate decision-making process (Pricellular acquisition, change in board composition).

Smith v Van Gorkom (transactions in corporate control unfairly affecting the plaintiff shareholder) is an example of a direct claim by shareholders.

There are more complicated: situations with a mix of direct and derivative claims (e.g. Benihana (duty of loyalty and dilution – the duty of loyalty claims would be derivative, the dilution claims are direct)).

Some issues (think, for example about Caremark-type situations) can be analyzed either as breaches of directors’ duties (derivative) or as securities claims, focusing on failures with respect to disclosure (direct).
Cases involving self-dealing by controlling stockholders are complicated: Sinclair Oil is brought as a derivative suit, but the idea in these cases is that harm is caused to the minority shareholder, which looks like a direct claim. 
Because of the remedy part of the test some cases could be brought either as a direct or as a derivative claim. For example a case involving a challenge to an executive compensation agreement could claim as a remedy a declaration that the agreement was invalid because the Board abdicated its responsibility to shareholders (Grimes v Donald). If the plaintiff sought damages for breach of the directors’ duties the case would be brought as a derivative suit.

In class  I referred to in In re Tesla Motors, Inc. Stockholder Litigation (you are not required to read the decision). Vice Chancellor Slights found that it was reasonably conceivable that Elon Musk, as a controlling stockholder, controlled the Tesla Board when it approved the acquisition of Solarcity, a corporation set up by Musk and 2 cousins which had been experiencing financial difficulties. The idea of Musk being a controlling stockholder was based partly on his 22.1% shareholding at the time and also on other factors, including Musk’s significance to Tesla (the VC noted that Musk might be the minority blockholder who could rally other stockholders to bridge the gap between the 22.1% and a majority holding and that the Plaintiffs had alleged that investments in Tesla represented investments in Musk and his vision for Tesla’s future (this was not enough on its own)), his willingness in the past to facilitate the ouster of senior management which might have influenced the Tesla directors, and the fact that practically no steps were taken to separate Musk from the Board’s consideration of the acquisition (for example there was no independent committee).

Week 7: February 25- March 1: For Tuesday, please read to page 320; for Wednesday to page 336; and for Thursday to page 358.

The following week we will not be having class on Tuesday 5th March.

Week 6: February 18-22 On Tuesday we will begin where we felt off on Thursday, with the Duray Development case. Please read to page 272 for Tuesday (although this is probably too ambitious).

For Wednesday please read to page 281. With respect to the break up of relationships in an LLC., as well as focusing on dissolution you should be aware that, in contrast to the partnership default rules, LLC rules may result in a member of an LLC who leaves being stuck with a financial interest in the LLC which they are unable to liquidate. The Florida statute provides for dissociation of a member to occur, but there is not a statutory buy-out. Under §605.0603 “a transferable interest owned by the person in the person’s capacity immediately before dissociation as a member is owned by the person solely as a transferee.” The ex-member loses management rights but retains financial rights. But unless there is a provision in the operating agreement this does not include a right to be bought out. And although the statute provides for dissolution, including court orders for dissolution which apply in a range of circumstances including deadlock, these provisions can be invoked by members and managers but not by ex-members. If those running the LLC decide not to make financial payments to the ex-member there may not be anything the ex-member can do about the situation – there’s a risk of being financially locked in but frozen out of decision-making and information. In the corporate context this sort of situation could be addressed by remedies for oppression. In the partnership context there would be a buyout right under RUPA. In the LLC typically this is an issue that is only resolved if there is a provision in the operating agreement.

On Wednesday I would also like to focus briefly on digital organizations. The Vermont LLC Act includes the following definitions:

“Operating agreement” means any form of description of membership rights and obligations … stored or depicted in any tangible or electronic medium, which is agreed to by the members, including amendments to the agreement.
“Meeting” means any structured communications conducted by participants in person or through the use of electronic or telecommunications medium permitting simultaneous or sequentially structured communications for the purpose of reaching a collective agreement.

For Thursday please read to page 296.

If you are interested you might want to read Shawn Bayern, Of Bitcoins, Independently Wealthy Software, and the Zero-Member LLC, 108 NWU L. Rev 1485 (2014);  Lynn M LoPucki, Algorithmic Entities, 95 Wash. U. L. Rev. 887 (2018).

Week 5: February 11-15 I have put links to the Florida and Delaware corporations and LLC statutes on the materials page.

On Tuesday we will begin with the forum selection by-laws issue.  Note that the Delaware Chancery Court upheld a choice of a North Carolina forum for a Delaware corporation in City of Providence v. First Citizens Bancshares, Inc., 99 A.3d 229 (Del. Ch. 2014). For Tuesday please read to page 214. For Wednesday please read to page 232 and for Thursday to  page 267.

In the middle of the week we will be thinking about corporate social responsibility and public benefit corporations. But the mixing of profit-making and public benefit can be complicated. Etsy (“our mission is to keep commerce human“) became a publicly traded B Corp, but investors were concerned that it wasn’t paying enough attention to shareholder value. Etsy’s response was to pay more attention to shareholder value, abandoning its B Corp status. In 2017 and 2018 Etsy announced that it would carry out stock repurchases. Allbirds and Patagonia are B Corps.

As to the one person corporation question, DGCL § 101 provides: (a) Any person, partnership, association or corporation, singly or jointly with others, and without regard to such person’s or entity’s residence, domicile or state of incorporation, may incorporate or organize a corporation under this chapter by filing with the Division of Corporations in the Department of State a certificate of incorporation…

Florida Statues § 607.0201 provides that one or more persons may act as the incorporator(s) of a corporation.  § 607.0803 states that a Board of Directors may consist of one or more individuals.  DGCL § 141(b) also allows for a Board of directors with only 1 director.

Week 4: February 4-8 On Tuesday we will begin with Day v Sidley & Austin (p 134). Please read to page 166 for Tuesday. For Wednesday please read to page 186.  Before we move on to corporations I would like to focus on contracting around the default rules so please read Florida Statutes §620.8103 (in the 2013 version of the Uniform Partnership Act this provision is in section 105  (please focus on the language in bold type). Please look at both versions and we will discuss them. The changes from the earlier to the later version align the provision with the similar provision in the Uniform Limited Liability Companies Act. I am not sure if we will get to this on Wednesday but if not we will discuss this on Thursday. For Thursday please read to page 210.

Week 3: January 28-February 1

On Tuesday we will begin with the Town & Country case and then move on to the partnership material.  And as we deal with the partnership cases you will also want to focus on the partnership statutes – and we will be using the Florida version of the Uniform Partnership Act. It is a good idea to read the entire statute, although we will focus on some of the provisions in more detail than others. One of the opportunities this class gives you is to familiarize yourself with statutes. In order to think about Fenwick in particular please read sections 6202.8202 (this is section 202 of the Revised Uniform Partnership Act or RUPA) and 620.8401 (RUPA section 401).  Please read to page 101 for Tuesday. For Wednesday please read to page 121, and study Florida Statutes § 6202.8404 (this provision was RUPA section 404, section 409 in the current version of RUPA – see CB p 107-8)). For Thursday I am going to ask you to read to page 156 (but we may not get further than page 139).

Week 2: January 21-25: On Tuesday we will pick up where we left off on Thursday, at page 25 of the Casebook, and I would like you to read to page 57 for Tuesday’s class. Please read to page 72 for Wednesday and to page 88 for Thursday.

When we get to the partnership material you will want to begin to look at the Florida Revised Uniform Partnership Act (the Florida version of the Revised Uniform Partnership Act). On formation see  § 620.8202 (RUPA §202).

Week 1: January 14-18

We will begin the course with agency: you will already be familiar with the concept of respondeat superior, and we will see that agents can also bind their principals to liability under contracts. From the perspective of an unpaid creditor, agency principles can be used to reach into deep pockets (if the principal is wealthy or has insurance). When thinking about the materials on authority bear in mind that officers of corporations (CEOs, CFOs etc) are agents of their corporations. The principles that apply to determine whether they have authority to bind their corporations are general agency principles.

For the first week of class I am assigning pages 1-72 of the Casebook.  Please read pages 1-13 for Tuesday, pages 13-35 for Wednesday and pages 35-72 for Thursday.

Please read the Class Policies.