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1 CONTENTS Preface Acknowledgments xxi xxv INTRODUCTION 1 ACTING THROUGH OTHERS: THE LAW OF AGENCY INTRODUCTION TO AGENCY AGENCY FORMATION, AGENCY TERMINATION, AND PRINCIPAL S LIABILITY Formation Termination Parties Conception Does Not Control 9 Jenson Farms Co. v. Cargill, Inc Liability in Contract Actual and Apparent Authority 13 White v. Thomas Inherent Authority 16 Gallant Ins. Co. v. Isaac Liability in Tort 22 Humble Oil & Refining Co. v. Martin 22 Hoover v. Sun Oil Co Liability in Tort Under the Apparent Authority Doctrine THE GOVERNANCE OF AGENCY (THE AGENT S DUTIES) The Nature of the Agent s Fiduciary Relationship The Agent s Duty of Loyalty to the Principal 28 Tarnowski v. Resop The Trustee s Duty to Trust Beneficiaries 30 In re Gleeson 31 1 xi

2 xii JOINT OWNERSHIP OF A BUSINESS: THE LAW OF PARTNERSHIPS AND LIMITED LIABILITY COMPANIES INTRODUCTION TO PARTNERSHIP: WHY JOINT OWNERSHIP? 34 William Klein & John C. Coffee, The Need To Assemble At-Risk Capital PARTNERSHIP FORMATION 39 Vohland v. Sweet RELATIONS WITH THIRD PARTIES Partnership Creditors Claims Against Departing Partners Third-Party Claims Against Partnership Property Claims of Partnership Creditors to Partner s Individual Property PARTNERSHIP GOVERNANCE AND ISSUES OF AUTHORITY 46 National Biscuit Co. v. Stroud TERMINATION (DISSOLUTION AND DISSOCIATION) Accounting for Partnership s Financial Status and Performance 49 Sample Partnership Balance Sheet 49 Sample Partnership Income Statement 49 Accounting for Partners Capital 50 Adams v. Jarvis Statutory Dissolution of a Partnership at Will Opportunistic Dissolution and the Partner s Duty of Loyalty 56 Page v. Page AGENCY CONFLICTS AMONG CO-OWNERS: FIDUCIARY DUTIES 59 Meinhard v. Salmon LIMITED LIABILITY SUCCESSORS OF THE GENERAL PARTNERSHIP The Limited Partnership The Limited Liability Partnership The Limited Liability Company Taxation of LLCs Contractual Flexibility 68 Pappas et al. v. Tzolis 69 2 THE CORPORATE FORM INTRODUCTION TO THE CORPORATE FORM CREATION OF A FICTIONAL LEGAL ENTITY A Note on the History of Corporate Formation The Process of Incorporating Today The Articles of Incorporation, or Charter The Corporate Bylaws Shareholders Agreements 85 3

3 xiii 3.3 LIMITED LIABILITY 85 Frank Easterbrook & Daniel Fischel, Limited Liability and the Corporation TRANSFERABLE SHARES CENTRALIZED MANAGEMENT Legal Construction of the Board The Holder of Primary Management Power 92 Automatic Self-Cleansing Filter Syndicate Co., Ltd. v. Cunninghame Structure and Function of the Board Formality in Board Operation A Critique of Boards Corporate Officers: Agents of the Corporation 98 Jennings v. Pittsburgh Mercantile Co. 99 THE PROTECTION OF CREDITORS MANDATORY DISCLOSURE CAPITAL REGULATION Financial Statements Distribution Constraints Minimum Capital and Capital Maintenance Requirements STANDARD-BASED DUTIES Director Liability Creditor Protection: Fraudulent Transfers Shareholder Liability Equitable Subordination 116 Costello v. Fazio Piercing the Corporate Veil 122 Sea-Land Services, Inc. v. The Pepper Source 123 Kinney Shoe Corp. v. Polan VEIL PIERCING ON BEHALF OF INVOLUNTARY CREDITORS 131 Walkovszky v. Carlton DEBT, EQUITY, AND ECONOMIC VALUE CAPITAL STRUCTURE Legal Character of Debt Legal Character of Equity BASIC CONCEPTS OF VALUATION The Time Value of Money Risk and Return Diversification and Systematic Risk 152 5

4 xiv 5.3 VALUING ASSETS The Discount Cash Flow (DCF) Approach The Relevance of Prices in the Securities Market 157 In re Emerging Communications Inc., Shareholder Litigation 158 NORMAL GOVERNANCE: THE VOTING SYSTEM INTRODUCTION: SHAREHOLDER VOTING IN THE NEW CORPORATE GOVERNANCE ELECTING AND REMOVING DIRECTORS Electing Directors Removing Directors SHAREHOLDER MEETINGS AND ALTERNATIVES PROXY VOTING AND ITS COSTS 173 Rosenfeld v. Fairchild Engine & Airplane Corp CLASS VOTING SHAREHOLDER INFORMATION RIGHTS TECHNIQUES FOR SEPARATING CONTROL FROM CASH FLOW RIGHTS Circular Control Structures 181 Speiser v. Baker Vote Buying 188 Frank Easterbrook & Daniel Fischel, Voting in Corporate Law 188 Schreiber v. Carney Controlling Minority Structures 197 Lucian A. Bebchuk, Reinier Kraakman & George G. Triantis, Stock Pyramids, Cross-Ownership, and Dual Class Equity MITIGATING A COLLECTIVE PROBLEM TODAY: ACTIVIST INVESTORS 201 Marcel Kahan & Edward B. Rock, Hedge Funds in Corporate Governance and Corporate Control THE FEDERAL PROXY RULES Rules 14a-1 Through 14a-7: Disclosure and Shareholder Communication Activist Investors and the Short Slate Proxy Contest Access to the Company s Proxy Statement: Rule 14a-8: Shareholder Proposals Rule 14a-9: The Antifraud Rule 214 Virginia Bankshares, Inc. v. Sandberg FIDUCIARY SUPERINTENDENCE OF SHAREHOLDER VOTING 224 Schnell v. Chris-Craft Industries, Inc. 225

5 xv NORMAL GOVERNANCE: THE DUTY OF CARE INTRODUCTION TO THE DUTY OF CARE THE DUTY OF CARE AND THE NEED TO MITIGATE DIRECTOR RISK AVERSION 230 Gagliardi v. TriFoods International, Inc STATUTORY TECHNIQUES FOR LIMITING DIRECTOR AND OFFICER RISK EXPOSURE Indemnification 233 Waltuch v. Conticommodity Services, Inc Directors and Officers Insurance JUDICIAL PROTECTION: THE BUSINESS JUDGMENT RULE 239 Kamin v. American Express Co Understanding the Business Judgment Rule The Duty of Care in Takeover Cases: A Note on Smith v. Van Gorkom Additional Statutory Protection: Authorization for Charter Provisions Waiving Liability for Due Care Violations THE BOARD S DUTY TO MONITOR: LOSSES CAUSED BY BOARD PASSIVITY 248 Francis v. United Jersey Bank 249 Graham v. Allis-Chalmers Manufacturing Co. 255 In the Matter of Michael Marchese 259 In re Caremark International Inc. Derivative Litigation 265 In re Citigroup Inc. Shareholder Derivative Litigation KNOWING VIOLATIONS OF LAW 277 Miller v. AT&T THE DUTY OF LOYALTY: CONFLICT TRANSACTIONS DUTY TO WHOM? The Shareholder Primacy Norm 284 A.P. Smith Manufacturing Co. v. Barlow Constituency Statutes Defining Corporate Purpose in the Charter: Benefit Corporations SELF-DEALING TRANSACTIONS The Disclosure Requirement 293 State ex rel. Hayes Oyster Co. v. Keypoint Oyster Co. 293 Melvin Eisenberg, Self-Interested Transactions in Corporate Law 296 8

6 xvi 8.3 THE EFFECT OF APPROVAL BY A DISINTERESTED PARTY Early Regulation of Fiduciary Self-Dealing Judicial Review of Self-Dealing Today: The Limited Role of Safe Harbor Statutes 300 Cookies Food Products v. Lakes Warehouse Judicial Review When Transaction Has Been Approved by a Disinterested Majority of the Board 305 Melvin Eisenberg, Self-Interested Transactions in Corporate Law 306 Cooke v. Oolie Approval by a Minority of Directors: Special Board Committees Shareholder Ratification of Conflict Transactions 309 Lewis v. Vogelstein CORPORATE DIRECTORS AND THE DUTY OF GOOD FAITH CONTROLLING SHAREHOLDERS AND THE FAIRNESS STANDARD Different Treatment for Controlling Shareholders? 313 Sinclair Oil Corp. v. Levien 314 Weinberger v. UOP, Inc Approval by a Board Minority of Independent Directors: Special Committees CORPORATE OPPORTUNITY DOCTRINE Determining Which Opportunities Belong to the Corporation When May a Fiduciary Take a Corporate Opportunity? THE DUTY OF LOYALTY IN CLOSE CORPORATIONS 330 Donahue v. Rodd Electrotype Co. 331 Frank Easterbrook & Daniel Fischel, Close Corporations and Agency Costs 336 Smith v. Atlantic Properties, Inc. 338 EXECUTIVE COMPENSATION INTRODUCTION THE CHALLENGE OF EXECUTIVE PAY Creating Incentives That Align Managers with Investors Political and Regulatory Responses to Executive Pay ARE U.S. CEOS PAID TOO MUCH? 352 Lucian Bebchuk & Jesse Fried, Pay Without Performance: Overview of the Issues 355 Bengt Holmstrom, Pay Without Performance and the Managerial Power Hypothesis: A Comment JUDICIAL REVIEW OF COMPENSATION The Law of Executive Officer Compensation 358 9

7 xvii In re The Goldman Sachs Group, Inc. Shareholder Litigation JUDICIAL REVIEW OF DIRECTOR COMPENSATION 368 Calma v. Templeton 369 SHAREHOLDER LAWSUITS DISTINGUISHING BETWEEN DIRECT AND DERIVATIVE CLAIMS SOLVING A COLLECTIVE ACTION PROBLEM: ATTORNEYS FEES AND THE INCENTIVE TO SUE 379 Fletcher v. A.J. Industries, Inc STANDING REQUIREMENTS BALANCING THE RIGHTS OF BOARDS TO MANAGE THE CORPORATION AND SHAREHOLDERS RIGHTS TO OBTAIN JUDICIAL REVIEW The Demand Requirement of Rule Levine v. Smith 388 Rales v. Blasband Special Litigation Committees 400 Zapata Corp. v. Maldonado 400 In re Oracle Corp. Derivative Litigation 406 Joy v. North DEALING WITH AN ABUNDANCE OF SHAREHOLDER SUITS: EXCLUSIVE FORUM BYLAWS SETTLEMENT AND INDEMNIFICATION Settlement by Class Representatives Settlement by Special Committee 422 Carlton Investments v. TLC Beatrice International Holdings, Inc WHEN ARE DERIVATIVE SUITS IN SHAREHOLDERS INTERESTS? TRANSACTIONS IN CONTROL SALES OF CONTROL BLOCKS: THE SELLER S DUTIES The Regulation of Control Premia 429 Zetlin v. Hanson Holdings, Inc. 430 Perlman v. Feldmann A Defense of the Market Rule in Sales of Control 437 Frank H. Easterbrook & Daniel R. Fischel, Corporate Control Transactions 437 In re Delphi Financial Group Shareholder Litigation SALE OF CORPORATE OFFICE LOOTING

8 xviii 11.4 TENDER OFFERS: THE BUYER S DUTIES 450 Brascan Ltd. v. Edper Equities Ltd THE HART-SCOTT-RODINO ACT WAITING PERIOD 456 FUNDAMENTAL TRANSACTIONS: MERGERS AND ACQUISITIONS INTRODUCTION ECONOMIC MOTIVES FOR MERGERS Integration as a Source of Value Other Sources of Value in Acquisitions: Tax, Agency Costs, and Diversification Suspect Motives for Mergers Do Mergers Create Value? THE EVOLUTION OF THE U.S. CORPORATE LAW OF MERGERS When Mergers Were Rare The Modern Era THE ALLOCATION OF POWER IN FUNDAMENTAL TRANSACTIONS OVERVIEW OF TRANSACTIONAL FORM Asset Acquisition 469 Katz v. Bregman Stock Acquisition Mergers Triangular Mergers STRUCTURING THE M&A TRANSACTION Timing Regulatory Approvals, Consents, and Title Transfers Planning Around Voting and Appraisal Rights Due Diligence, Representations and Warranties, Covenants, and Indemnification Deal Protections and Termination Fees Accounting Treatment A Case Study: Excerpt from Timberjack Agreement and Plan of Merger THE APPRAISAL REMEDY History and Theory The Appraisal Alternative in Interested Mergers The Market-Out Rule The Nature of Fair Value Discounted Cash Flow Analysis Current Developments in Appraisal THE DE FACTO MERGER DOCTRINE 498 Hariton v. Arco Electronics, Inc THE DUTY OF LOYALTY IN CONTROLLED MERGERS Cash Mergers or Freeze-Outs 503 Kahn v. Lynch Communications Systems, Inc. 505 Kahn v. M&F Worldwide Corp et al

9 xix Do Controlling Shareholders Have a Duty to Offer Only a Fair Price on the First, Tender Offer Step of a Two Step Freeze-Out? 520 In re CNX Gas Corporation Shareholders Litigation 521 PUBLIC CONTESTS FOR CORPORATE CONTROL INTRODUCTION DEFENDING AGAINST HOSTILE TENDER OFFERS 534 Unocal Corp. v. Mesa Petroleum Co PRIVATE LAW INNOVATION: THE POISON PILL CHOOSING A MERGER OR BUYOUT PARTNER: REVLON, ITS SEQUELS, AND ITS PREQUELS 547 Smith v. Van Gorkom 548 Revlon, Inc. v. MacAndrews and Forbes Holdings, Inc PULLING TOGETHER UNOCAL AND REVLON 560 Paramount Communications, Inc. v. Time, Inc. 561 Paramount Communications, Inc. v. QVC Network, Inc REGULATION OF TAKEOVERS IN OTHER LEGAL SYSTEMS BRINGING TAKEOVERS LAW DOWN TO DATE 584 Lyondell Chemical Co. v. Ryan 584 C&J Energy Services, Inc. v. City of Miami General Employees and Sanitation Employees Retirement Trust PROTECTING THE DEAL No Shops/No Talks and Fiduciary Outs Shareholder Lock-ups 597 Omnicare, Inc. v. NCS Healthcare, Inc STATE ANTITAKEOVER STATUTES First- and Second-Generation Antitakeover Statutes ( ) Third-Generation Antitakeover Statutes PROXY CONTESTS FOR CORPORATE CONTROL 610 Blasius Industries, Inc. v. Atlas Corp TRADING IN THE CORPORATION S SECURITIES COMMON LAW OF DIRECTORS DUTIES WHEN TRADING IN THE CORPORATION S STOCK 617 Goodwin v. Agassiz 618

10 xx 14.2 THE CORPORATE LAW OF INSIDER TRADING POST-GOODWIN 621 Freeman v. Decio (b) AND RULE 16-b UNDER THE 1934 ACT EXCHANGE ACT 10(b) AND RULE 10b Evolution of Private Right of Action Under Elements of a 10b-5 Claim Early Rule 10b-5 Insider Trading Liability: The Equal Access Theory 630 SEC v. Texas Gulf Sulphur Co. 630 Santa Fe Industries, Inc. v. Green The Equal Access Theory of Rule 10b-5 Liability Elements of 10b-5 Liability: The Fiduciary Duty Theory 641 Chiarella v. United States The Problem of Tippees after Chiarella 647 Dirks v. SEC 647 United States v. Newman Note on Regulation FD The Introduction of the Misappropriation Theory 663 United States v. O Hagan Civil Liability, Civil Fines, and Criminal Penalties for Security Fraud Violations 666 Elkind v. Liggett & Myers, Inc THE OTHER SIDE OF 10B-5: FRAUD-ON-THE-MARKET CLASS ACTIONS Materiality and Reliance in FOM Class Actions 671 Basic Inc. v. Levinson Loss Causation in 10b-5 Class Actions The Role of Class Certification in Recent Challenges to FOM Actions INSIDER TRADING AND FOM CLASS ACTIONS: THE ACADEMIC POLICY DEBATES The Insider-Trading Debate The Academic Policy Debate over FOM Class Actions 687 Table of Cases 693 Index 699