1. Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm Slide 1 of 22 Random International, “Rain Room” (Expo 1: New York, 2013)

2. Corporations: A Contemporary Approach Chapter 2 Corporation Basics Slide 2 of 23 Chapter 2 Corporation Basics Corporation as “private constitution” Basic corporate vocabulary –corporate categories –corporate characteristics –organic documents –corporate actors –corporate securities –fiduciary duties (derivative suit) –corporate law vs. other law Corporate powers –change annual meeting –equitable limitations Module I – Fundamentals Citizen of world Law profession Corporate practice Bar exam Bar exam

3. Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm Slide 3 of 25 Corporate practice Law profession Citizen of world Bar exam Bar exam Why BusOrgs?

4. Corporations: A Contemporary Approach Chapter 2 Corporation Basics Slide 4 of 23 Corporate hierarchies Corporation (officers) Shareholders Corporate statute (judge-made law) Board of Directors Articles of Incorporation By-laws Constitution Corporation as private constitution

5. Corporations: A Contemporary Approach Chapter 2 Corporation Basics Slide 5 of 23 1.“Exit, voice and loyalty” in political organizations are similar to “liquidity, voting and fiduciary duties” in the corporation. True or false? 2.Public corporations are -- a.a type of non-profit corporation b. a type of private corporation c.a type of close corporation d.a corporation regulated only by federal law 3. Corporations MUST have: a.Separate identity b.Perpetual life c.Limited liability d.Centralized management (board of directors) e.Transferable shares 4. Shareholders have a right to liquidate their investment and sell their shares to the corporation. True or false? Pop quiz 1–T / 2–B / 3–A / 4–F

6. Corporations: A Contemporary Approach Chapter 2 Corporation Basics Slide 6 of 23 5.Chancellor Bill Allen is just about the cutest jurist in the land. True or false? 6. The Model Business Corporate Act is – a.uniform statute adopted in most states b.ABA draft statute for states to adopt/revise as they choose c.modeled on the Delaware General Corporation Law 7. Corporate law is: a.Primarily judge-made law (see ALI Principles) b.A product of each state under choice of law principles c.Primarily concerned with defining rights of securities -- stock, debentures, bonds, preferred shares 8.The articles of incorporation (choose two): a.Trump corporate statutes b.Trump corporate bylaws c.Name the board of directors d.Must be filed with the secretary of state 1–T / 2–B / 3–B / 4–B, D

7. Corporations: A Contemporary Approach Chapter 2 Corporation Basics Slide 7 of 23 Corporate fiduciary duties … A corporation during WWII – with more business than it know what to do with -- spends $1 million to sponsor a “variety hour” radio program. One of the singers on the program is wife of the company’s board chair/ president. A shareholder claims the directors, in approving this expenditure, violated their fiduciary duties. Please analyze.

8. Corporations: A Contemporary Approach Chapter 2 Corporation Basics Slide 8 of 23 Duty of loyalty “[P]ersonal transactions of directors with the corporations … may tend to produce a conflict between self-interest and fiduciary obligation, are when challenged examined with the most scrupulous care.” Business judgment rule (BJR) “Questions of policy of management … are left solely to their honest and unselfish decision … and the exercise of them for the common and general interests of the corporation may not be questioned.” Duty of care “[A director] is called upon to use care, to exercise judgment, the degree of care, the kind of judgment, that one would give in similar situations to the conduct of his own affairs.” Corporate Fiduciary Duties Presumption forPresumption against Bayer v. Beran, (NY Sup. Ct 1944)

9. Corporations: A Contemporary Approach Chapter 2 Corporation Basics Slide 9 of 23 Enforcement of fiduciary duties … (1) Derivative suit (2) Class action

10. Corporations: A Contemporary Approach Chapter 2 Corporation Basics Slide 10 of 23 Derivative suit (enforce duties to corporation) Corporation Shareholder (lawyer) Fiduciaries “on behalf of corporation” violation of corporate duties (recovery to corporation)

11. Corporations: A Contemporary Approach Chapter 2 Corporation Basics Slide 11 of 23 Class action (enforce duties to shareholders) Corporation Sh rep (lawyer) Insiders “on behalf of class” violation of direct duties (recovery to shareholders) Shareholder class

12. Corporations: A Contemporary Approach Chapter 2 Corporation Basics Slide 12 of 23 With great power comes great responsibility … Setting the shareholders’ meeting date …

13. Corporations: A Contemporary Approach Chapter 2 Corporation Basics Slide 13 of 23 What is a proxy insurgency? Corporation Shareholders elect new board Board of directors Insurgent  Shareholders Schnell v. Chris-Craft Industries, Inc. (Del. 1971)

14. Corporations: A Contemporary Approach Chapter 2 Corporation Basics Slide 14 of 23 Insurgency timeline (1971) Dec 08 - Proposed new date for meeting (Cortland, NY) Sep 17 - Shareholder insurgent group forms Jan 11 - Original date for meeting (bylaws) SepDecNovJanOct Oct 18 - Board meets and amends bylaws Oct 27 - Shareholder group learns of new meeting date

15. Corporations: A Contemporary Approach Chapter 2 Corporation Basics Slide 15 of 23 Power vs. Duty “… Management has attempted to use the corporate machinery and the Delaware Law for the purpose of perpetuating itself in office … for the purpose of obstructing the legitimate efforts of dissident stockholders … These are inequitable purposes, contrary to established principles of corporate democracy.” Schnell v. Chris-Craft Industries, Inc. (Del. 1971) Delaware Supreme Court (2009)

16. Corporations: A Contemporary Approach Chapter 2 Corporation Basics Slide 16 of 23 Delaware’s “product” Dec 08 - Proposed new date for meeting (Cortland, NY) Sep 17 - Shareholder insurgent group forms Jan 11 - Original meeting date (bylaws) SepDecNovJanOct Oct 18 - Board meets and amends bylaws Oct 27 - Shareholder group learns of new meeting date Nov 1 - Shareholder group files action Nov 10 - Chancery Court grants access to SH list Nov 18 - Chancery Court denies prelim injunc Nov 29 - Sup Ct remands / postpone mtg

17. Corporations: A Contemporary Approach Chapter 2 Corporation Basics Slide 17 of 23 What is a tender offer? Corporation Shareholders Board of directors Hostile bidder (1) buy shares (2) elect new board Stahl v. Apple Bancorporation, Inc. (Del. Ch. 1990)

18. Corporations: A Contemporary Approach Chapter 2 Corporation Basics Slide 18 of 23 Takeover timeline (1986-90) 3/19/90 - Board fixes record date for April 17, but no mtg date 9/86 - Stahl buys 20% of outstanding Bancorp shares 3/28/90 - Stahl starts TO @ $38 cash, provided gets bd majority 1986199019911989 11/7/86 - Stahl reaches 30.3% ownership 11/22/89 - Stahl proposes bylaw change and board-packing plan 4/9/90 - Special bd mtg: finan advisors say TO is unfair; Bd withdraws record date to look for alternatives 5/9/90 - Stahl sends out proxy materials 5/14/90 - Stahl seeks prelim injunc requiring SH mtg

19. Corporations: A Contemporary Approach Chapter 2 Corporation Basics Slide 19 of 23 Power vs. Duty “Fiduciary duties constitute a network of responsibilities that overlay the exercise of even undoubted legal power.” “I cannot conclude that defendants have taken action for the purpose of impairing or impeding the effective exercise of the corporate franchise.” “Deferring this company’s annual meeting where no meeting date has yet been set and no proxies even solicited does not impair or impede the effective exercise of the franchise.” “Plaintiff has no legal right to compel the holding of the company’s annual meeting or right in equity to require the board to call a meeting now.” Stahl v. Apple Bancorporation, Inc. (Del. Ch. 1990) Chancellor William Allen

20. Corporations: A Contemporary Approach Chapter 2 Corporation Basics Slide 20 of 23 Reconcile the cases … (1)Schnell: board has power -- but it’s inequitable for board to change meeting date and impede voting insurgency (2)Stahl: board has power -- and it’s equitable for board to not set meeting date in face of insurgency/tender offer

21. Corporations: A Contemporary Approach Chapter 2 Corporation Basics Slide 21 of 23 The end