Business Organizations Cases Outline
Business organizations law is the body of law governing business creation, management, and dissolution. It concerns topics such as agency relationships, fiduciary duties, and shareholder rights. Most business organizations concepts are codified in state law, but courts have played an important role in further defining these rights and obligations. Below is an outline of key cases in business organizations law with links to the full text of virtually every case, provided free by Justia.
Agency
An agency relationship is a fiduciary relationship that arises between two parties when one party (the “principal”) manifests assent to another party (the “agent”) that the agent may act on the principal’s behalf, subject to the principal’s control, and the agent consents. A principal may be liable for acts of an agent within the scope of the agent’s authority, and agents may sometimes be liable for acts purportedly taken on behalf of a principal.
Gorton v. Doty 一 An agency relationship is created when one party consents to act on behalf of another party, subject to the other party’s control. It does not matter whether a contract was executed or money exchanged.
A. Gay Jenson Farms Co. v. Cargill, Inc. 一 Once one party consents to act on behalf of another party and subject to the other party’s control, an agency relationship is created, even if the parties did not intend such a relationship and its legal consequences.
Mill Street Church of Christ v. Hogan 一 Implied authority is actual authority established by circumstantial evidence. It is determined by examining how the agent would reasonably believe that the principal wished them to act or the authority that the principal wished to bestow, given the present or past conduct of the principal and the nature of the task. A principal may be bound by the acts of their agent even if a third party was unaware that the agent’s authority was only implied.
Three-Seventy Leasing Corp. v. Ampex Corp. 一 An agent’s apparent authority will bind a principal if the principal’s acts would lead a reasonably prudent person to assume that the agent had such authority. An agent has apparent authority to do things that are usual and proper to the business that they are employed to conduct, so long as third parties do not have knowledge to the contrary.
Watteau v. Fenwick 一 A principal is bound by the acts of their agent if those acts are within the authority usually given to an agent of that character, notwithstanding any limitations placed on that authority. This is true even if the principal is undisclosed to third parties, and instead the third party believes that the agent is acting on their own behalf.
Botticello v. Stefanovicz 一 A principal may ratify a prior non-binding act done or professedly done on their account if they intend to ratify the act, accept the results of the act, and have full knowledge of all the material circumstances. Receiving a benefit from the act may not constitute ratification unless the other requirements for ratification have been met.
Hoddeson v. Koos Bros. 一 A proprietor may have a duty to exercise reasonable care and vigilance to protect customers from any disadvantages that may arise from a third party deceptively acting as the proprietor’s agent, even if there is no proof of a real agency relationship.
Atlantic Salmon A/S v. Curran 一 If an agent does not disclose the identity of the principal, they may be personally liable for their actions on behalf of the principal. The other party does not have a duty to discover the identity of the principal, even if they have the means to do so.
Humble Oil & Refining Co. v. Martin 一 A party may be liable as a principal (master) if they exert considerable control over the responsibilities of another party. This may be true even if a contract between the parties labeled the agent (servant) an independent contractor.
Hoover v. Sun Oil Company 一 A principal-agent (master-servant) relationship does not exist if the so-called principal has no control over the day-to-day operations of the so-called agent’s business.
Murphy v. Holiday Inns, Inc. 一 The extent of control that one party exercises over another party determines whether their relationship is that of a principal and agent. The parties’ express denial of an agency relationship in their franchise agreement will not control.
Miller v. McDonald’s Corp. 一 An actual agency relationship may exist if the franchisor retains the right to control the franchisee’s daily operations. An apparent agency relationship may exist if the franchisor holds the franchisee out as an agent by imposing certain requirements for the sake of maintaining an image of uniformity.
Scope of Employment
Under the doctrine of respondeat superior, an employer (or principal) may be liable for the wrongful acts of an employee (or agent) occurring within the scope of their employment.
Ira S. Bushey & Sons, Inc v. U.S. 一 An employer may be liable under the doctrine of respondeat superior if the employee’s actions fall within the scope of their employment.
Manning v. Grimsley 一 An employer may be liable for an employee’s assault if the assault was in response to the plaintiff’s interference with the employee’s job duties.
Arguello v. Conoco, Inc. 一 An employer is not liable for an employee’s torts if they occurred outside of the scope of employment unless (1) the employer intended the conduct or consequence; (2) the employer was negligent or reckless; (3) the conduct violated a non-delegable duty of the employer; or (4) the employee purported to speak on behalf of the employer. In determining whether an employee acted within the scope of their employment, a court will consider (1) the time, place, and purpose of the act; (2) the act’s similarity to acts that the employee was authorized to perform; (3) whether the act is commonly performed by employees; (4) the extent of departure from normal methods; and (5) whether the employer could reasonably expect the employee to act in such a manner.
Majestic Realty Associates, Inc. v. Toti Contracting Co. 一 One cannot delegate certain duties, such as the duty of care that arises during inherently dangerous work.
Fiduciary Duties of Agents
Agents owe principals certain duties, such as the fiduciary duty of good faith and honesty. However, a principal may give an agent permission to violate many of these duties so long as the agent acts in good faith, discloses all material facts, and deals fairly.
Reading v. Regem 一 An agent who profits from their position by violating their duty of good faith and honesty is accountable to the principal.
Rash v. J.V. Intermediate, Ltd. 一 An agent may violate their fiduciary duty if they fail to deal openly with the principal and do not fully disclose material information about matters affecting the principal’s business.
Town & Country House & Home Service, Inc. v. Newbery 一 Even after an agency relationship ends, a former agent may not solicit the former principal’s customers who are known to the former agent only because of information obtained during employment.
Formation of Partnerships
A partnership is an association of two or more people carrying on a business as co-owners for profit. A partnership is its own entity, distinct from each partner. Each partner in a partnership is an agent of the partnership.
Fenwick v. Unemployment Compensation Commission 一 Profit sharing by itself is not definitive evidence of a partnership; a court must weigh certain factors such as the intent of the parties, the right and obligation to share in profits and losses, and the parties’ control of the partnership property and business. The fact that the parties referred to themselves as partners in their agreement will not alone establish a partnership.
Martin v. Peyton 一 A creditor’s right to inspect the books and be paid with profits does not create a partnership because these rights are granted to protect the creditor’s own assets.
Southex Exhibitions, Inc. v. Rhode Island Builders Assoc., Inc. 一 Profit sharing is just one factor to be considered in determining whether a partnership exists. The existence of a partnership is evaluated by the totality of the circumstances.
Young v. Jones 一 A party may be liable under the theory of estoppel by representing themselves or permitting another party to represent themselves as a partner in an existing partnership or a partner with others not actually in a partnership if a third party reasonably relied on that representation.
Fiduciary Duties of Partners
Partners owe one another fiduciary duties, such as the duties of good faith and loyalty. A partner may be held liable if they violate one of their fiduciary duties.
Meinhard v. Salmon 一 Partners owe one another a duty of loyalty and therefore a duty to disclose opportunities relevant to the partnership. (This decision was overridden by the Revised Uniform Partnership Act (RUPA) §409(e).)
Sandvick v. LaCrosse 一 A joint venture requires (1) contribution by the parties of money, property, time, or skill in some common undertaking, regardless of whether those contributions are equal; (2) a proprietary interest and right of mutual control over the engaged property; (3) an express or implied agreement for the sharing of profits, and sometimes losses; and (4) an express or implied contract forming a joint venture. Joint ventures are similar to partnerships and are subject to principles of partnership law, but joint ventures are limited in scope and duration. Joint venturers owe one another the same duties as partners.
Meehan v. Shaughnessy 一 A fiduciary may plan to compete with the entity to which they owe allegiance, but they must render on demand true and full information regarding all things affecting the partnership. Partners must adhere to their duty of good faith and loyalty by considering their partners’ welfare alongside their own.
Lawlis v. Kightlinger & Gray 一 Partners retain the duty to act in good faith, even when expelling a partner.
Partnership Management and Rights
Partners generally share in the management, rights, and obligations of the partnership. However, a partner’s rights and obligations may be limited under certain circumstances.
Putnam v. Shoaf 一 A partner owns no personal specific interest in any single asset or property of the partnership. Instead, all assets and property are owned by the partnership. A partner’s interest is their pro rata share of the net value or deficit of the partnership.
National Biscuit Company v. Stroud 一 Each partner is an agent of the partnership and has the ability to bind the partnership within the scope of the business, unless the partner has no authority to act for the partnership in such a manner, and the person dealing with them knows of that restriction.
Summers v. Dooley 一 A dissenting partner may not be responsible for expenses incurred by another partner acting individually rather than for the benefit of the partnership.
Day v. Sidley & Austin 一 Partners are generally free to override common law and statutory standards by agreement. Furthermore, there is no fiduciary duty to disclose information that does not produce a profit for the offending partners or a financial loss to the partnership as a whole if concealed.
Holzman v. De Escamilla 一 A limited partner may not be liable as a general partner unless they take part in the control of the business.
Partnership Dissolutions
Generally, a partnership may end by a definite term, the express will of all the partners to wind up, the expiration of terms or the completion of the undertaking, an event making it unlawful to continue, or a judicial determination.
Owen v. Cohen 一 A court may decree a dissolution when one partner has prejudiced the partnership or breached the partnership agreement, making it unreasonably impractical to carry on the business. Continued petty quarrels may be enough for a court to order the dissolution of a partnership.
Collins v. Lewis 一 A partner may not obtain a judicial dissolution if their conduct alone caused harm to the partnership.
Giles v. Giles Land Co. 一 A partner may be dissociated when they engage in wrongful conduct that adversely and materially affects the partnership or makes it unreasonably impractical to carry on the business. Threats to family members in a family partnership may meet this standard.
Prentiss v. Sheffel 一 A partner may bid on the resale of partnership assets so long as there is no bad faith.
Pav-Saver Corp. v. Vasso Corp. 一 Upon the dissolution of a partnership in violation of the partnership agreement, each partner who has not wrongfully caused the dissolution may pursue damages for breach of contract, possess partnership property, and continue the partnership business. The value of the goodwill of the business will not be considered in determining the value of the wrongfully dissolving partner’s interest in the partnership.
Kovacik v. Reed 一 When one partner contributes capital, and the other contributes only services, each loses their own contributions and cannot hold the other accountable for those losses.
G&S Investments v. Belman 一 Filing a complaint for judicial dissolution of a partnership does not act as a dissolution of that partnership.
Limited Liability Companies
A limited liability company is a business structure that provides protection to members from the debts of the entity. However, members may still be held liable under certain circumstances, such as when a court pierces the LLC veil.
Duray Development, LLC v. Perrin 一 The de facto corporation rule, which provides that a corporation defectively formed but in good faith may still be considered a corporation, may apply to the formation of LLCs.
Elf Atochem N. America, Inc. v. Jaffari 一 The Delaware LLC Act gives broad discretion to members to draft agreements that may only be overridden when the agreement is inconsistent with a mandatory provision of the Act.
Fisk Ventures, LLC v. Segal 一 Members do not breach their duty of good faith and fair dealing by merely exercising their contractual rights under their operating agreement.
NetJets Aviation, Inc. v. LHC Communications, LLC 一 Under certain circumstances, the distinction between an owner and a business may be disregarded in order to reach the owner for the business’ debts. A court may pierce the veil when the owner and the business operated as a single economic entity, and there was an overall element of injustice or unfairness. When determining whether an LLC was merely an alter ego, somewhat less emphasis is placed on whether the LLC observed internal formalities because few formalities are legally required.
McConnell v. Hunt Sports Enterprises 一 LLC members are free to limit the scope of their fiduciary duties in their agreement.
Racing Investment Fund 2000, LLC v. Clay Ward Agency, Inc. 一 An LLC member’s assumption of personal liability is so antithetical to the purpose of an LLC that such an assumption must be unequivocally stated so as to leave no doubt of the parties’ intent.
New Horizons Supply Cooperative v. Haack 一 An LLC member may become personally responsible for the LLC’s debts if they fail to properly wind up the entity’s affairs after dissolution.
Corporate Limited Liability
A plaintiff may attempt to pierce the corporate veil in order to reach the corporation’s stockholders for judgment. In order to pierce the corporate veil, a plaintiff will generally need to show that the corporation is a mere instrumentality or alter ego of its stockholder and that failing to pierce the veil would lead to injustice beyond that of preventing the plaintiff from recovering the judgment that they seek.
Walkovszky v. Carlton 一 A corporate form will not be disregarded to reach the assets of a stockholder simply because the assets of the corporation are insufficient to provide a plaintiff with the recovery that they seek.
Sea-Land Services, Inc. v. Pepper Source 一 In order to pierce the corporate veil, a plaintiff must show that there is a unity of interest between the individual and the corporation, such that separate identities no longer exist, and that a failure to do so would promote injustice beyond leaving the plaintiff unable to collect a judgment.
In re Silicone Gel Breast Implants Products Liability Litigation 一 A parent corporation will naturally exert some control over its subsidiary, but when a corporation is so controlled that it is the alter ego or mere instrumentality of its stockholder, the corporate form may be disregarded. A showing of fraud is not required.
Frigidaire Sales Corp. v. Union Properties, Inc. 一 Limited partners cannot be held liable for a corporate general partner’s breach of contract when there is no injustice or fraud perpetrated on the third party dealing with the corporate general partner, and the corporate general partner is controlled by the limited partners only and clearly in their capacity as agents.
The Role and Purposes of Corporations
A corporation is bound to act in the interests of its shareholders, but it may also exercise valid business judgment and may not be subject to court intervention simply because a shareholder disagrees with that judgment.
A.P. Smith Mfg. Co. v. Barlow 一 A corporation may make charitable donations to increase goodwill so long as the donations comply with state law and are not made in furtherance of personal rather than corporate interests.
Dodge v. Ford Motor Co. 一 A corporation must act in the interests of its shareholders and not in a charitable manner to benefit the public if this interferes with its primary purpose of making a profit.
Shlensky v. Wrigley 一 A stockholder’s derivative action must allege that the corporation’s directors caused the shareholder financial loss due to fraud, illegality, or a conflict of interest. It is not sufficient that the stockholder disagrees with the directors’ honest business judgment.
Corporate Duty of Care
Corporate directors owe a duty of care to refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law. Under the business judgment rule, directors’ decisions are presumed to be in good faith, on an informed basis, and with the honest belief that the decision was in the best interest of the company.
Kamin v. American Express Company 一 The payment of dividends falls exclusively within the business judgment rule. A court will not interfere with a business judgment unless the directors have acted or are about to act fraudulently or in bad faith.
Smith v. Van Gorkom 一 The burden is on the plaintiff to rebut the presumption that a decision that a corporate board made using its business judgment was informed. The proper standard is gross negligence. Directors may breach their fiduciary duty by failing to inform themselves of all the reasonably available and relevant information before making a decision and by failing to disclose all the material information that a reasonable stockholder would find important.
Francis v. United Jersey Bank 一 Directors must keep themselves informed about the activities of the corporation and its financial status to avoid breaching their duty of care. If a director discovers an illegal course of action, the director is obligated to object to such action and, if the corporation does not correct the conduct, resign.
Corporate Duty of Loyalty
Corporate directors owe a duty of loyalty and generally must refrain from putting their personal interests ahead of the corporation’s interests. Self-dealing or the taking of a corporate opportunity may violate the duty of loyalty if a fiduciary does not fully disclose the details of the transaction and their conflict of interest.
Bayer v. Beran 一 There is no breach of the duty of loyalty when a company hires a board member’s wife to perform legitimate and useful advertising services.
Benihana of Tokyo, Inc. v. Benihana, Inc. 一 Self-dealing may be permissible if all the material facts as to the director’s interest in the transaction are known to the board of directors, and the board in good faith authorizes the transaction by a majority of disinterested directors. Once approved by disinterested directors, a court will evaluate the transaction under the business judgment rule.
Broz v. Cellular Info. Systems, Inc. 一 Under the corporate opportunity doctrine, a corporate fiduciary must place the interests of the corporation before their own in appropriate circumstances. In determining whether a corporate officer or director usurped an opportunity properly belonging to the corporation, a court may consider whether the corporation is financially able to exploit the opportunity, the opportunity falls within the corporation’s line of business, the corporation has an interest or expectancy in the opportunity, and the corporate fiduciary would be in conflict with their duties to the corporation if they took the opportunity as their own.
In re eBay, Inc. Shareholders Litigation 一 Corporate directors and officers may be liable for usurping corporate opportunities by accepting lucrative investment opportunities from a third party as an inducement to maintain corporate business.
Sinclair Oil Corp. v. Levien 一 When a parent company transacts with its subsidiary, and there is evidence of self-dealing, a court will analyze the transaction under a standard of intrinsic fairness. Self-dealing only occurs when the parent causes the subsidiary to act in such a way that the parent receives something from the subsidiary to the exclusion of and detriment to the minority stockholders of the subsidiary.
Zahn v. Transamerica Corp. 一 When a stockholder only represents themselves, they may vote in their own best interests. However, when a majority stockholder exercises power and control over a corporation, like a director, they have a fiduciary duty to vote as a trustee for all the stockholders.
Fliegler v. Lawrence 一 Shareholder ratification of an interested transaction may shift the burden of proof to an objecting shareholder to show that the terms are so unequal as to amount to a gift or waste. However, ratification may not be legitimate if the majority of shares voting in favor are held by interested parties, and there is not enough evidence that disinterested shareholders ratified the transaction.
Corporate Duty of Good Faith
Corporate directors owe a duty of good faith and may breach that duty when they disregard their responsibilities. Directors have a duty to exercise appropriate oversight of corporate activities in good faith, among other responsibilities.
In re The Walt Disney Co. Derivative Litigation 一 Gross negligence, without more, cannot constitute bad faith. The duties of care and good faith are separate and distinct. A third category of fiduciary conduct, falling between conduct motivated by subjective bad faith and conduct resulting from gross negligence, is an intentional dereliction of duty or a conscious disregard for one’s responsibilities. This kind of conduct may constitute a violation of the duty of good faith.
Graham v. Allis-Chalmers Mfg. Co. 一 Directors have no duty to install and operate a corporate system of espionage to ferret out wrongdoing that they have no reason to suspect exists.
In re Caremark Intern. Inc. Derivative Litigation 一 Directors may be liable for failing to exercise appropriate oversight of corporate activities if they knew or should have known that violations of the law were happening, they made no good-faith effort to prevent or remedy the situation, and their failure proximately caused the loss alleged. Generally, only a sustained or systematic failure to exercise appropriate oversight will establish the lack of good faith necessary for liability.
Stone v. Ritter 一 Directors who fail to act when there is a known duty to act may be liable for a breach of the duty of loyalty by failing to fulfill their fiduciary obligations in good faith. The duty to act in good faith is a subsidiary element of the duty of loyalty. A failure to act in good faith may result in liability, but indirectly.
Derivative Actions
A derivative action is a lawsuit brought by a shareholder on behalf of a corporation. Generally, a plaintiff wishing to file a derivative action on behalf of a corporation must establish either that they made a demand on the board to initiate litigation, and it was refused, or that a demand would be futile.
Rales v. Blasband 一 When the board that would be considering the demand did not make a challenged business decision, demand may be excused as futile if the particularized factual allegations create a reasonable doubt that a majority of board members, at the time when the complaint was filed, could exercise independent and disinterested business judgment in responding to a demand.
Aronson v. Lewis 一 When a complaint challenges an affirmative business decision made by the same board that would be considering the demand, demand may be excused as futile if the particularized factual allegations create a reasonable doubt that the directors were disinterested and independent and that the challenged transaction was otherwise the product of a valid business judgment.
In re China Agritech, Inc. Shareholder Derivative Litigation 一 A plaintiff who pursues a derivative action must establish either that they made a demand on the board to initiate litigation, and it was refused, or that a demand would be futile. When determining demand futility for claims regarding a decision by the board that would consider the demand, the Aronson test applies. When a claim does not involve a business decision made by the board that would consider the demand, the Rales test applies.
United Food and Commercial Workers Union v. Zuckerberg 一 Combining the tests outlined in Aronson and Rales, a demand may be excused as futile if a majority of the board, evaluated director-by-director, (1) received a material personal benefit from the alleged misconduct, (2) faces a substantial likelihood of liability on any of the claims, or (3) lacks independence from someone who received a material personal benefit from the alleged misconduct or faces a substantial likelihood of liability on any of the claims.
Cohen v. Beneficial Industrial Loan Corp. 一 A derivative action in federal court due to diversity of citizenship may be subject to state non-procedural derivative lawsuit rules, including laws requiring a stockholder to give security for a corporation's reasonable expenses.
Eisenberg v. Flying Tiger Line, Inc. 一 If an alleged injury is to the individual stockholder, rather than the corporation, the action is more characteristic of a representative class action than a derivative lawsuit.
Grimes v. Donald 一 A plaintiff cannot argue that demand is excused if they have already made a demand to the board. However, the plaintiff may assert that the demand was wrongfully refused or may submit other demands.
Marx v. Akers 一 Directors may be self-interested, and demand therefore excused, when they will receive a direct financial benefit different from the benefit to shareholders generally.
Auerbach v. Bennett 一 The business judgment rule shields a special committee’s decisions if the committee is found to be disinterested and independent. A court may, however, review the disinterested independence of the committee members in relation to the appropriateness and sufficiency of their investigative procedures.
Zapata Corp. v. Maldonado 一 A board may appoint a special committee to evaluate a shareholder’s action, but that committee will not automatically be considered independent. Instead, a court may grant the special committee’s motion to dismiss when demand is excused only if (1) the committee was independent, acted in good faith, and made a reasonable investigation; and (2) the court uses its own independent business judgment to determine that the action should be dismissed.
In re Oracle Corp. Derivative Litigation 一 A member of a special committee may not be independent if they are incapable of making a decision with only the best interests of the corporation in mind for any substantial reason.
Proxies, Proxy Statements, and Shareholder Proposals
Companies are required to file proxy statements with the Securities and Exchange Commission when they seek shareholder votes. Proxy statements are meant to provide shareholders with all the material information that they will need to decide how to vote. Companies must sometimes include shareholder proposals in their proxy materials.
Levin v. Metro-Goldwyn-Mayer, Inc. 一 Proxies may be solicited using corporate resources so long as there is no irreparable harm.
Rosenfeld v. Fairchild Engine & Airplane Corp. 一 Directors may spend reasonable corporate assets in good faith to solicit proxies and defend a policy contest, but a court may disallow expenditures that advance personal power, are against the stockholders’ and the corporation’s best interests, or are otherwise unfair and unreasonable. Stockholders also have the right to reimburse successful contestants for reasonable and bona fide expenses.
J.I. Case Co. v. Borak 一 Private parties have the right under Section 27 of the Securities Exchange Act to bring a private lawsuit for violating Section 14(a) by making false and misleading statements while soliciting proxies.
Mills v. Electric Auto-Lite Co. 一 A plaintiff may establish a cause of action under Section 14(a) of the Securities Exchange Act upon a showing that a misstatement or omission was material and had the ability to influence a shareholder’s vote.
Seinfeld v. Bartz 一 A false or misleading statement or omission is material under Rule 14a-9 of the SEC if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote, but not necessarily that it would have changed their vote.
Lovenheim v. Iroquois Brands, Ltd. 一 Shareholder proposals may be included in a company’s proxy materials so long as they are significantly related to the company’s business. The proposal need not be economically significant to be significantly related.
AFSCME v. AIG, Inc. 一 Proxy access bylaw proposals that relate to election procedures generally rather than specific, upcoming elections are non-excludable under SEC Rule 14-a8(i)(8).
CA, Inc. v. AFSCME Employees Pension Plan 一 Bylaws may be proposed and unilaterally enacted by shareholders of a Delaware corporation when they appropriately relate to corporate processes rather than substantive decisions. A bylaw that requires the expenditure of corporate funds is not necessarily substantive.
Inspection Rights
Shareholders generally have the right to inspect certain corporate records as long as they are seeking the information in good faith.
Crane Co. v. Anaconda Co. 一 A qualified stockholder may inspect a corporation’s stock register for the purpose of identifying and reaching out to other stockholders to discuss a tender offer so long as the information is sought in good faith rather than for an improper purpose.
State ex rel. Pillsbury v. Honeywell, Inc. 一 A shareholder seeking to obtain corporate records must prove a proper purpose. A proper purpose must relate to shareholder or corporate economic interests, rather than a general disagreement with corporate policies.
Sadler v. NCR Corp. 一 A New York law entitling resident shareholders to inspect shareholder lists and lists of non-objecting beneficial owners of out-of-state corporations does not violate the Commerce Clause of the Constitution.
Control and Abuse of Control
Stock ownership generally confers some level of control over a corporation, but this control may be abused — especially in close corporations in which shareholders owe one another a duty of good faith similar to that imposed on partners.
Stroh v. Blackhawk Holding Corp. 一 A class of stock may be valid even if those shares do not confer an economic interest. In Illinois, stock only requires some sort of management or control rights to be valid.
Ringling Bros.-Barnum & Bailey Combined Shows v. Ringling 一 A contract between shareholders to vote their stock together in a particular way may be valid.
McQuade v. Stoneham 一 Shareholders may combine to elect directors, but not to limit the power of directors to exercise their own judgment.
Clark v. Dodge 一 An agreement among shareholders to control management decisions may be valid if all the shareholders are party to the agreement.
Galler v. Galler 一 An agreement between shareholders of a close corporation that controls voting and management decisions may be valid so long as enforcement would not be harmful to a minority interest, the public, or creditors.
Ramos v. Estrada 一 Voting agreements requiring shareholders to vote with the majority are enforceable, regardless of whether the corporation is a close corporation.
Wilkes v. Springside Nursing Home, Inc. 一 Shareholders in a close corporation have a duty to one another to act in good faith and may not terminate a minority shareholder’s employment without a valid business purpose. Furthermore, a shareholder may still prevail if they can show that the same business objective could have been achieved in a manner less harmful to their interests.
Ingle v. Glamore Motor Sales, Inc. 一 A minority shareholder in a close corporation whose shareholder agreement provides the right to buy back their shares upon termination of employment is not protected from at-will discharge.
Brodie v. Jordan 一 When majority shareholders of a close corporation breach their fiduciary duties to a minority shareholder by freezing them out, the proper remedy is to restore, as nearly as possible, the benefits that the minority shareholder could have reasonably expected had there been no breach.
Smith v. Atlantic Properties, Inc. 一 Minority shareholders in a close corporation owe majority shareholders the same fiduciary duties that are owed to them.
Jordan v. Duff and Phelps, Inc. 一 A close corporation has a duty to disclose material information when attempting to buy shares from a shareholder. Material information may include a possible merger, even if an agreement on price and structure has not yet been reached.
Pedro v. Pedro 一 Majority shareholders of a close corporation who buy back a shareholder’s shares after a breach of fiduciary duty must pay a fair market value for those shares.
Frandsen v. Jensen-Sundquist Agency, Inc. 一 A minority shareholder’s right of first refusal triggered by the majority shareholders’ sale of stock in a close corporation does not imply a right to control the sale of the corporation’s assets or liquidation. A proposed merger is not an offer to sell stock that would trigger stock transfer restrictions.
Zetlin v. Hanson Holdings, Inc. 一 A party may obtain a controlling block of shares for a premium price without extending a tender offer to all shareholders so long as there is no evidence of bad faith, such as corporate looting or fraud.
Perlman v. Feldmann 一 A majority shareholder, especially when they are also a director, has a fiduciary duty to the corporation and its minority shareholders to not misappropriate corporate opportunities. Therefore, such a fiduciary who sells their shares may be accountable to minority shareholders for the premium paid.
Essex Universal Corp. v. Yates 一 If the transfer of shares constitutes the transfer of sufficient voting power, an agreement that the selling party will assist the buying party in accelerating the installation of a favorable board of directors may be valid.
Dissolution
Forced dissolution is an extreme remedy, and courts will often consider other available remedies before ordering dissolution.
Alaska Plastics, Inc. v. Coppock 一 A close corporation may be required to repurchase its shares from a shareholder if there is a provision in the articles of incorporation or bylaws, if the shareholder successfully petitions the court for involuntary dissolution, if there is a significant change in the corporate structure, or if there is a breach of fiduciary duty. Liquidation is an extreme remedy that should be avoided if possible.
Haley v. Talcott 一 Under the Delaware LLC Act, a court may order dissolution of an LLC if it is no longer reasonably practicable to continue the business in conformity with the LLC agreement. However, judicial dissolution might not be warranted if there is an equitable alternative specified in the LLC agreement.
Stuparich v. Harbor Furniture Mfg., Inc. 一 A plaintiff may not be entitled to judicial dissolution of a close corporation if they fail to show that dissolution is necessary to protect their rights and interests.
Inside Information
SEC Rule 10b-5 prohibits fraud and deceit, including making untrue statements of material fact or omitting material facts, in connection with the purchase or sale of securities. This rule covers instances of insider trading, in which a party uses confidential information to manipulate the market in their favor.
Goodwin v. Agassiz 一 Since a director has certain knowledge of the condition of a corporation, they must engage in fair dealing when directly buying or selling the corporation’s stock. However, a party with insider information is not obligated to disclose such information when purchasing stock through a broker on the stock exchange.
SEC v. Texas Gulf Sulphur Co. 一 An individual with access to material information intended only for business use cannot use that information to trade for their own benefit until it becomes reasonably available to the public. Material information is information that would be important to a reasonable investor and that reasonably might affect the value of a corporation’s stock or securities.
Dirks v. SEC 一 A tippee, who receives material non-public information from an insider, assumes a fiduciary duty to shareholders not to trade on that information when they know or should know that the insider breached their fiduciary duty by disclosing that information. There is no breach of fiduciary duty unless the tipper (the insider) receives a personal benefit from disclosure.
U.S. v. O’Hagan 一 An individual, such as an attorney whose firm is involved in a proposed tender offer, who trades using confidential information misappropriated in a breach of a fiduciary duty to the source of the information may be guilty of securities fraud.
Salman v. U.S. 一 A tip given as a “gift” to a close family member satisfies the personal benefit test for the purpose of establishing liability for insider trading.
Mergers
When corporations merge, shareholders are given certain rights, such as the right to sell back their shares at a fair value if they vote against the merger (the right of appraisal). A de facto merger may occur when a transaction between corporations resembles a merger in result. However, many courts, including Delaware, have moved away from the de facto merger doctrine in favor of freedom for corporations.
Farris v. Glen Alden Corp. 一 If a contemplated transaction’s result is the same as a merger in that it fundamentally changes the character of the corporation and the shareholders’ interests, the transaction is a de facto merger, and the corporation’s shareholders have the same rights as those provided under a merger, including the right to dissent and receive the fair value of their shares.
Rauch v. RCA Corp. 一 The conversion of shares into cash as part of a merger is separate and distinct from the redemption of shares by a corporation.
Hariton v. Arco Electronics, Inc. 一 A reorganization plan that requires one corporation to sell its assets to a second corporation in exchange for stock in the second corporation and that calls for the first corporation to liquidate and distribute the second corporation’s shares to its stockholders is more akin to a sale of assets, which is separate and distinct from a merger.
Weinberger v. UOP, Inc. 一 If a cash-out merger’s approval was obtained with less than full disclosure in a breach of the majority shareholder’s duty to the minority shareholders, minority shareholders are entitled to damages. When directors stand on both sides of a transaction, they have the burden of establishing entire fairness: fair dealing and fair price.
Kahn v. M&F Worldwide Corp. 一 The business judgment standard of review applies to controlling-stockholder mergers that are conditioned on the approval of an independent and properly empowered special committee that fulfills its duty of care and the uncoerced, informed vote of a majority of the minority stockholders.
Coggins v. New England Patriots Football Club, Inc. 一 Minority shareholders “frozen out” by a merger may be entitled to relief if the freeze-out merger does not serve a valid corporate objective beyond advancing the majority shareholder’s personal interests. If there is a valid corporate objective, the court will then examine whether the transaction was fair, considering the totality of the circumstances.
This outline has been compiled by the Justia team for solely educational purposes and should not be treated as an independent source of legal authority or a summary of the current state of the law. Students should use this outline as a supplement rather than a substitute for course-specific outlines.
