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spring 2019 archive

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.

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).

For Thursday please read to page 296.

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.