Appunti advanced company and business law

LBO;

- source of the numbers unclear

• market test is not reliable: nobody would compete with a combined offer, the market

knew that the deal was done and Mr Pritzker was given an unfair advantage: he was

given 1mln shares issued at discount. In case the deal was not concluded, he could

have sold his shares to the buyer and get a profit, it was a sort of insurance for him.

• Van Gorkom’s personal conflict: near to retirement, just wanted to make a profit and

leave.

Market test: period of time in which the company will receive competing offerings, if

they don’t receive higher offerings, the LBO should be done because it’s the highest

possible price they could get.

Outside director: come from outside, they check the adequacy of the process.

Directors were held liable. In Delaware law, new statutory rule to protect at least

outside directors. The court decision influenced the following law.

The business judgment rule is intended to be applied to different contexts. Not all

board decision are the same. Some involve conflicts of interest.

Caremark

Healthcare provider bribes physicians to sell their drugs. They got fined. SH hold that

the company had been managed poorly. Derivative action against managers that

didn’t monitor properly the employees, which caused a loss for the company. The BOD

was not held liable because they didn’t have the possibility to find out this behavior

from the company’s documents. They were complying with an adequate monitoring

system, they didn’t suspect any wrong action so they couldn’t put in place any

espionage. The size of the firm is relevant and the complexity/inherent risk of the

company affects the monitoring system. Assumption that the BOD’ judgment is in

good faith, so they shouldn’t be held liable. The second requirement in the BJR is to

make judgments in a good faith effort. Errors are tolerated.

Citigroup

Subprime mortgage: getting a loan without qualifications for that, based on the idea

that should they default, the bank would take the house back (asset-backed

mortgage). SH claim was based on the fact that directors should have noticed it was a

risky business. The court doesn’t hold the directors liable, couldn’t prove the

overseeing system was improper, they see the claim only based on the fact that SH

lose money. The company had a reporting system, had information available. The

company suffered a loss but this isn’t enough to sustain a lack of good faith.

Class 15

• Self-dealing transaction: directors transacting with themselves, representing on one

side themselves and on the other side the company.

• Appropriation of business opportunities: stealing an opportunity of the company

that they get to know thanks to the position they have

• Compensation of officers: in some jurisdiction it depends on a board decision. Risk

that it doesn’t remunerate the effort towards the best interest of the company but

just to make people rich regardless of their contribution to the company

• Controlling SH transaction: he determines a transaction that may be detrimental to

minority SHs

Hayes Oyster v. Keypoint Oyster

Coast is looking for liquidity, so it plans to sell 2 assets. Hayes is a shareholder and

also a manager, he has a contract of no competition with Hayes Oyster. Engman

(former employee in Coast) proposes to Verne Hayes to start a new business: Keypoint

Oyster. The only way to overcome the requirement of no competition is to ask is family

to invest for him. When the assets were sold to Keypoint Oysters, nobody knew that

Verne Hayes owned part of it. We expect Verne to advise because from this info

depends a lot of issues. The deal was negotiated by an interested party, so he

breached his fiduciary duty. Verne holds that Coast was in need of money, so he just

created a deal at an appropriate price. The court is not looking for a fraudulent intent

to steal away from the corporation to find the breach. The fix for violation of the duty

of loyalty is not to ask the director to bring compensation to the company but to bring

the deal back to before it took place—> restitution in nature: you leave the property in

place and you take Hayes Oyster away.

Self-dealing: Director receives a benefit which is not split equally with other people

that are entitled to it. The most obvious example is when he represent the company in

a transaction with himself. The risk is selling at an unfair price, or the asset may be

useless for the company, ultimately resulting in a harm for the corporation. Purchase

of a property nearby the property of a director: the value of the area would be

positively affected by the presence of the company.

The most typical approach is compromise: you should not make the company give up

the opportunity in any case but the transaction needs to be analyzed. The SH can

decide or ratify this decision. If you have procedural rules to deal with these issues,

and there was no compliance, you should expected no mercy for the directors! They

will not be excused for their behavior. In case of compliance, but at the same time

there was a violation, there should be an investigation of the fairness. This depends on

how you allocate the burden of proof.

Lewis v. SLE

SLE (tyre dealership) owns lands and buildings. LGT operates the company. This

structure is typical of real estate, separation of ownership and management. Leon

owns both businesses, has 6 children who each get to own a share of the company,

treated equally (owning 15 shares of SLE). Only 3 kids own shares of LGT, not

proportionally. 1972: shareholder agreement concerning the children not involved in

LGT to sell shares to LGT. Price is set at book value. When the triggering date comes,

the value of the shares is incredibly low. In 1966 there was a lease who wasn’t

renewed, and nobody cared.

1st trial decision: Donald is the plaintiff, claiming mismanagement (issue on duty if

loyalty, as a consequence the company suffered a harm). The directors planned a very

low value of the company. Rejection on the basis of the BJR. The burden of proof was

on the plaintiff

2nd appellate trial: no room for BJR because there is a conflict of interest, shifts the

burden of proof to the defendant, they need to prove the entire fairness of the

transaction.

In Delaware self-dealing transactions are not considered automatically void just

because of the conflicted interest. In case of compliance, the BJR applies, directors

assumed to be in good faith. Independent directors have gained a huge role in

controlling SH transactions, fulfilling the arm’s length transaction.

173-177 UK Companies Act: directors are obliged to avoid conflicts of interest. Very

similar provision with Italy and Delaware. Directs are obliged to declare if there’s a

conflict, any change must be let known to fellow directors.

Today Homes v. Williams

Real estate projects, single family houses. Project of developing gated community,

idea to set up a business together. George breached his fiduciary duty, he’s not sitting

on both sides of the transaction but steals a business opportunity away from the

company. Court’s analysis: 1. Was this a corporate opportunity? Yes.

2. Did the defendants have a duty to disclose? Yes. Did they disclose? No.

Unbending rule is abrogated only if the fiduciary obtains the consent of the

corporation after full disclosure. The burden of proof was shifted due to the ability of

the plaintiff to show the prima facie case.

Generally, the burden of proof is on the plaintiff. In this case, it is shifted due to:

• The opportunity for the business exists

• No disclosure

• No consent

How to determine which info to be disclosed? Lagarde test.

Donahue v. Rodd

H. Rodd owns 80%-200 shares. 117 given to kids, 2 treasury, 81 (45 buyback/800$

book value in 1970+30 donated+6 left to kids)

J. Donahue owns 20%-50 shares

Minority shareholder complained because she was not given the same opportunity of

buying back. Since it’s a closely held company, she is trapped inside the company, she

cannot sell her shares on the market: she holds it’s a breach of fiduciary duty, risk of

oppression or disadvantage by majority. The same opportunity is to be given to all

shareholders, it’s not a managerial choice.

Class 17

An action is derivative when you are bringing to ha SH a complaint on behalf of the

company, you are supplementing the inability of the company to seek a remedy. There

may be reluctancy of directors to bring complaints to previous/recent directors. SH are

disincentivized because they have the certainty of spending money and resources to

bring the action and bring together all the claimants but not the certainty of getting

benefits. Policy issues involved:

• incentives to sue and settle

• Contingent fees: law firms will anticipate the expenses for SH and get a

reimbursement only upon a favorable settlement

• Strike suits: need to find an equilibrium

Plaintiffs are required to meet some requirements

The company was harmed, not the SHs: only derivative action is possible.

Demand requirement: a director should not bring action to another director, conflict of

interest.

If the BoD refuses to accepts the SH request, SH can challenge, but BJR applies.

Italian law on derivative action: the right to sue a director is left to the company by a

SH meeting decision, not a board decision. This avoids the conflict of interest. If a

majority vote takes place, probably the same majority that voted the BoD, the conflict

of interest shifts to majority/minority SHs rather than BoD.

In Europe derivative action is uncommon, due to various technical elements but also

cultural aspects exist, which make it difficult to understand the reasons.

HYPO: relevant issue because the meeting was long, they took the necessary time and

information—> the duty of procedural care has been complied with. A special

committee was in place, but John and Paula shouldn’t have been in the committee.

The way the committee was formed was not the best one. The plaintiff is not likely to

recover monetary damages because it’s a derivative action.

Class 18

Different types of SHs agreements:

• first option

• Russian roulette: generally used in M&A, or joint venture

• Absolute prohibition: generally not accepted, usually low cap

• Drag-along: also for M&A, power of selling party to force minority SHs to sell

• Tag-along: Ability of minority to force majority to sell their shares

The aim of the draft is to avoid the risk of circumvention, writing it as clear as possible.

Class 19

In a negotiated transaction both parties are involved in the negotiations, the target

board cooperated with the acquiring party. In a hostile transaction, the board decides

whether to defend from the initiative or collaborate. Non-statutory acquisitions: the

board is not cooperative (ex tender offer or takeover).

Buying sh