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spring 2020 archive

March 18 update: Originally I was not going to allow a pass/fail option for this class, but in light of recent developments I have changed my mind. The deadline for choosing the pass/fail option is, I think, March 29 but the Law School may extend this. I am going to have the exam administered as a take-home exam, and my current thinking is that I will allow you to choose any 8 hour time slot during the exam period to take the final exam. The way this works is that you write your exam as a word document, and you can have access to your notes as you do this, and then you upload the file. I hope that this helps to reduce your stress at this time.

To a large extent it makes sense now to focus your energies on reviewing what we have studied so far. We will be adding material on derivative litigation although we have touched on some of the issues so far. And I want you to learn something about securities regulation, but after that we will focus on review.

Week 10: March 16-20: The University has extended Spring Break for another week so we will not be having classes this week. We have covered a large amount of the material I would usually cover in this class. I think I mentioned before that our originally scheduled class time exceeded ABA requirements by a substantial amount. So we will not need to make up the time we miss during this week. I will be providing video lectures on the remaining material and then we can move on to review. I am happy to answer questions you may have via email. And if there are questions many people have I can post them to the blog with my responses.

I have also turned on comments on this page if you would like to post comments or questions here directly.

I hope you are all doing well.

So here is the assignment I originally posted for this week: We will be focusing on derivative litigation this week, but before spending more time on issues of demand, direct versus derivative claims and special litigation committees I’d like to spend some time looking at the Tesla litigation, and in particular on the issue of control.

In 2018 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).

For Tuesday please read In re Tesla Motors, Inc. Stockholder Litigation (Del. Ch. 2020), which will allow us to focus on the dual fiduciary issue we have noted before, and also Kahn v M & F Worldwide Corp (Del. 2014, noted in the Tesla decision at fn 54) and Corwin v KKR Financial Holdings LLC (Del. 2015) . Corwin holds that the business judgment rule applies to a transaction decision made by the Board which is approved by a majority of disinterested, fully informed and uncoerced stockholders, so long as there is no conflicted controlling stockholder. Kahn provides that a transaction involving a controlling stockholder will be subject to the business judgment rule if it is both (i) negotiated by a well-functioning special committee of independent directors and (ii) conditioned on the approval of a majority of the minority shareholders. This is another example of the focus on process we have noticed before. The involvement of a controlling stockholder has implications for how much process is necessary to ensure that the business judgment rule applies. Tesla shows how flexible the definition of control is.

Please also read to page 380 for Tuesday. On Wednesday we will focus on special litigation committees so please read to page 393 and also read In re Oracle Corporation Derivative Litigation (Del. Ch. 2019). For Thursday please read to page 419.

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.

Have a good weekend.

Week 9: March 9-13: Spring Break. I hope you are enjoying the break.

Week 8: March 2-6: On Tuesday we will begin with the corporate opportunities cases and please read to page 339. For Wednesday please read to page 358 and also read Marchand v Barnhill (Del. Supr. 2019). For Thursday please read to page 380.

Please be sure to read DGCL §144 (this link is to the subchapter of the statute dealing with directors and officers) and Florida Statutes § 607.0832 and 607.0143.

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.

Week 7: February 24-28: We will begin on Tuesday with a brief discussion of digital entities and competition between states to be attractive locations for business entities. I am adding links to the Florida and Delaware corporations statutes to the materials page. I also added a link to a report on changes to the Florida corporations statute last year, in effect as of the beginning of this year. You are not required to read the report but you may find it interesting.

Please read to page 296 of the Casebook for Tuesday, to page 320 for Wednesday and to page 339 for Thursday.

Week 6: February 17-21: On Tuesday we will start where we left off, with some discussion of corporate social responsibility/ESG and we will think about Dodge v Ford and Schlensky v Wrigley. Please also read the first 2 LLC cases, Duray Development and Elf Atochem (to page 246). Please read to page 271 for Wednesday and to page 296 for Thursday. We may not get beyond the LLC and digital entities material this week, however.

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.

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).

Week 5: February 10-14: On Tuesday next week we will begin by discussing limited liability partnerships (see Florida Statutes § 620.8306) , and we will also look at Florida Statutes § 620.8103 (which addresses the issue of contracting around default rules). We will then move on to learn about other business entities where the owners have limited liability. And we will also think more about the idea of contracting around fiduciary duties. For Tuesday please read to page 191. For Wednesday please read to page 210 and for Thursday to page 225.

With respect to the forum selection issue in corporate by-laws, 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). And there is an issue as to whether a corporation may have a valid bylaw for the arbitration of shareholder claims.

After veil piercing 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.

Week 4: February 3-7: We will not be having class on Thursday next week. For Tuesday’s class please read to page 149 and for Wednesday to page 174.

Week 3: January 27-31 Please read the Florida Revised Uniform Partnership Act (the Florida version of the Revised Uniform Partnership Act). It is a good idea to have a sense of the entire statute although we will focus on some specific provisions.

For Tuesday please see §620.8202 (RUPA §202) and §620.8401 (RUPA § 401) and read to page 101. For Wednesday please read to page 121 (and also 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 please read to page 149.

Week 2: January 20-24 On Tuesday we will begin with the material on tort liability of principals. Please read to page 53 for Tuesday, to page 72 for Wednesday and to page 88 for Thursday (I am assigning the first partnership case in the book, although we may not get to that point).

Week 1: January 13-17: 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 (and idea you may have come across in your contracts class). 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.

Please read pages 1-35 of the Casebook. For Tuesday please read to page 13, for Wednesday to page 24. and for Thursday to page 35.

You can access the Restatement 3rd of Agency via the Hein Online link on the Law School Library web page (look in Hein Online (via the quick link) and then find the American Law Institute Library).

Here are the Class Policies.