ITT You Teach Romo Corporations Forum

[romothesavior]

I seriously don't get it. Everyone keeps telling me how easy it is and I feel like a dumbass for not getting it. I just fail to see the forest through the trees; it doesn't seem to go together, and the doctrines are just downright stupid (Delaware courts... you all suck royally at making coherent doctrines).

So ITT you answer my questions so I don't destroy my GPA. I'm sure I will have many questions, and I imagine most will be stupid.

First question: We learned that plaintiffs can receive an order for involuntary dissolution where the acts of the directors of those in control are illegal, oppressive, or fraudulent. We then defined "oppression" as conduct that substantially defeats a minority shareholder's reasonable expectations. These must be:

1) Reasonable under the circumstances
2) Known by the majority
3) Central to the plaintiff's decision to join the venture

So how does this not just get shut down by the BJR every single time?

[bk1]

This thread is relevant to my interests.

I'm in BA and we didn't cover dissolution of corporations. It seems to me that it should get BJR protection. I'm thinking that somehow it might be a bad faith breach of the duty of loyalty, but I'm not sure exactly how "oppression" would constitute bad faith. Is there a dominant shareholder? Then it seems like it might be easier to crack the BJR because it seems closer to a bad faith violation of the duty of loyalty since the dominant SH owes duty of loyalty to the minority SH.

[Big Shrimpin]

Just do Revlon duties, bro.

[JCougar]

I seriously don't get it. Everyone keeps telling me how easy it is and I feel like a dumbass for not getting it. I just fail to see the forest through the trees; it doesn't seem to go together, and the doctrines are just downright stupid (Delaware courts... you all suck royally at making coherent doctrines).

So ITT you answer my questions so I don't destroy my GPA. I'm sure I will have many questions, and I imagine most will be stupid.

First question: We learned that plaintiffs can receive an order for involuntary dissolution where the acts of the directors of those in control are illegal, oppressive, or fraudulent. We then defined "oppression" as conduct that substantially defeats a minority shareholder's reasonable expectations. These must be:

1) Reasonable under the circumstances
2) Known by the majority
3) Central to the plaintiff's decision to join the venture

So how does this not just get shut down by the BJR every single time?

I didn't get it either, but then the night before the exam I just googled some stuff and found a bunch of pamphlets released online by Paul Hastings and some other Biglaw firm. But that was about mergers. It was only about 3 pages of reading, but it made about 250 pages of the casebook instantly make sense.

We didn't cover dissolution, though, so I have no idea how to help you there. If you want the merger material, I can forward it to you.

[dailygrind]

This thread is relevant to my interests.

I'm in BA and we didn't cover dissolution of corporations. It seems to me that it should get BJR protection. I'm thinking that somehow it might be a bad faith breach of the duty of loyalty, but I'm not sure exactly how "oppression" would constitute bad faith. Is there a dominant shareholder? Then it seems like it might be easier to crack the BJR because it seems closer to a bad faith violation of the duty of loyalty since the dominant SH owes duty of loyalty to the minority SH.

I took corps a year ago, but I'd agree with your line of analysis. "Oppression" looks a lot like a duty of loyalty claim under some heading like stealing a corporate opportunity or self-dealing to the detriment of shareholders. BJR is just a presumption, and the most deferential portions apply to due care (gross negligence standard). The good faith portion of it I don't recall being deferential, and I don't really think it really helps with duty of loyalty claims once the plaintiff present prima facie evidence of breach of fiduciary duty.

[apl6783]

I seriously don't get it. Everyone keeps telling me how easy it is and I feel like a dumbass for not getting it. I just fail to see the forest through the trees; it doesn't seem to go together, and the doctrines are just downright stupid (Delaware courts... you all suck royally at making coherent doctrines).

So ITT you answer my questions so I don't destroy my GPA. I'm sure I will have many questions, and I imagine most will be stupid.

First question: We learned that plaintiffs can receive an order for involuntary dissolution where the acts of the directors of those in control are illegal, oppressive, or fraudulent. We then defined "oppression" as conduct that substantially defeats a minority shareholder's reasonable expectations. These must be:

1) Reasonable under the circumstances
2) Known by the majority
3) Central to the plaintiff's decision to join the venture

So how does this not just get shut down by the BJR every single time?

I THINK (Be sure to salt this shit before you eat it):

The reason is that the BJR protects directors. But in oppression cases the director is also a majority shareholder. The status as the majority SH is what gives rise to the cause of action for oppression (from Wilkes and I think Donahue). Read and understand:

As to his actions as a director, reason that the Business Judgment Rule does not apply to this fact pattern is that two of the exceptions to the BJR are when the director at issue has a conflict of interest (since BJR only governs duty of care, not duty of loyalty) and when his decision has no legitimate business purpose.

That being said, when there is oppression going on, it is because (1) we're in a close corporation - which I think is the only time you have a CL cause of action for oppression and (2) because the director is also a majority shareholder and an employee. Oppression = the guy is doing mean things to the minority shareholder because he is trying to squeeze him out. Another type of oppression is where the majority shareholder fires the minority shareholder (who was previously also an employee) and then pays himself all the earnings in salary (conflict of interest - he's setting his own salary).

Thus, oppressive moves by the majority SH (who's also controlling the board and is also an officer most likely) fall into the no business purpose BJR exception just mentioned. Also, as I hinted before he may have violated his duty of loyalty if his oppressive activity involved giving himself a huge salary since that is an interested director transaction (conflict of interest- situations not covered by BJR since that only covers duty of care). Under the test for that he'd then have to present it to the board for a vote of disinterested directors (or by disinterested shareholders) and they'd have to ratify the deal (to pay him more money). But in this situation since the board is dominated by him (and he owns a majority of shares), he wouldn't meet the requirement that it be a vote by disinterested directors or shareholders so he'll have to show that the transaction was ENTIRELY FAIR in court. That's a whole different standard and is hard to meet.

THE KICKER - These breaches are of duties owed to the CORPORATION not the other shareholders. Thus, these breaches let the corporation or the SH sue derivatively. The problem with that is that the corporation won't choose to sue the director because it's dominated by the controlling SH, and a derivative suit just won't work for reasons that don't matter.

That's where the CL cause of action for oppression comes in. It's from the Wilkes case and it says that you get to sue the majority SH because in close corporations the majority SH owes the minority a fiduciary duty. That cause of action lets you SUE the majority shareholder directly. This common law cause of action is not recognized in Delaware. DE does have a statutory cause of action but the only remedy is dissolution.

Finally: what counts as oppressive? What you listed was correct. The gist of oppression is that there are employees who happen to own stock in the company (maybe as part of their compensation) and then there are shareholders who are also employees and the purpose of their ownership of stock is to be employed in the company - close corporations. If you're an employee who also happens to own stock, then they can fire you and do whatever they want. You're really just an employee. If its the other way around though, and your primary interest in owning stock is to be an employee and an officer - to really be an owner & manager - and then the majority SH fires you or reduces your salary to zero or removes you from the board or whatever, that's oppression.

[romothesavior]

Ah, gotcha. That makes a lot of sense in my head, I hope it is right.

If I were to summarize that in a quick couple of sentences, would it be fair to say:

"The BJR shields directors, not shareholders. Oppression is an act of the majority shareholders to the disadvantage of the minority shareholders. Therefore, while a director may also be a majority shareholder, he only may claim BJR presumptions when he acts in his capacity as a director, not when he is being an asshole majority shareholder to the minority shareholders."

I know there is some other golden stuff in that response, but conceptually this is the gist of it, yes?

[apl6783]

Ah, gotcha. That makes a lot of sense in my head, I hope it is right.

If I were to summarize that in a quick couple of sentences, would it be fair to say:

"The BJR shields directors, not shareholders. Oppression is an act of the majority shareholders to the disadvantage of the minority shareholders. Therefore, while a director may also be a majority shareholder, he only may claim BJR presumptions when he acts in his capacity as a director, not when he is being an asshole majority shareholder to the minority shareholders."

I know there is some other golden stuff in that response, but conceptually this is the gist of it, yes?

Almost, but I'm not comfortable with how you're defining BJR. It's not primarily about "capacity." That is more of an incidental thing. It's primarily about who has what fiduciary duties and who they owe them too.

BJR is only a defense to suits for breach of DUTY OF CARE (and not loyalty) by a director. The duty of care is owed TO THE CORPORATION. Therefore, only the corporation (or a shareholder suing derivatively) can sue for breach of the duty of care. The corp will sue, director will raise defense of BJR. If he loses because the action fell into one of the BJR exceptions, the judgment against the director for breach of duty of care goes to the corporation (even if the suit was brought derivatively by a SH, who may happen to be a minority SH).

At the same time, a majority shareholder owes a fiduciary duty to the minority shareholder (in close corporations only and only in some states - not Delaware). He breaches this duty when he engages in oppression (as you defined it). If he breaches this duty, the minority shareholder can sue him directly. He can defend against the suit by showing that the allegedly "oppressive" behavior had a legitimate business purpose that could not be achieved in a less oppressive way (it's basically like strict scrutiny in con law).

Thus, if we're talking about a close corporation where the majority SH is also a director and he engages in oppressive behavior then he is going to have breached the fiduciary duty to the minority shareholder and PROBABLY his duty of care and duty of loyalty to the corporation.

[romothesavior]

Got it. That was actually a really good explanation. Do you mind being on call between now and 3 AM to tutor me through this difficult time in my top-law-schools.com?

Next up, what in the holy hell is the "obgligation/duty of good faith" and why can't courts articulate just what it means? In particular, I'm trying to understand where Ritter/Caremark fit in. I thought Caremark was a Duty of Care case, but I have this dude's outline and he has it listed as "The Intersection of Loyalty and Good Faith." Conceptually I understand Loyalty and Duty of Care, but Good Faith throws it all for a loop in my head.

Is it basically that gross negligence is a Duty of Care claim, and that can be exculpated, while complete abrogation of duties is a more serious thing that shows a lack of Good Faith?

[bk1]

The court fucks up in Disney and implies that there is a 3rd duty of good faith (in addition to the duties of care/loyalty) that can be violated independently by a director and serve as a basis for a lawsuit. Ritter clarifies that there is no 3rd "duty of good faith" merely that there is an obligation of good faith that exists underneath both duty of care and duty of loyalty.

The standard for what violates good faith is very high. I have 2 possible breaches of good faith under duty of loyalty: subjective bad faith and intentional dereliction of duty. I don't have any possible breaches of good faith under duty of care (gross negligence doesn't have to do with good faith), but note that a sustained and systematic failure to exercise oversight would be an intentional dereliction of duty (which is a violation of good faith under duty of loyalty).

[JusticeHarlan]

Next up, what in the holy hell is the "obgligation/duty of good faith" and why can't courts articulate just what it means? In particular, I'm trying to understand where Ritter/Caremark fit in. I thought Caremark was a Duty of Care case, but I have this dude's outline and he has it listed as "The Intersection of Loyalty and Good Faith." Conceptually I understand Loyalty and Duty of Care, but Good Faith throws it all for a loop in my head.

Is it basically that gross negligence is a Duty of Care claim, and that can be exculpated, while complete abrogation of duties is a more serious thing that shows a lack of Good Faith?

My understanding: Ritter made it clear that Good Faith is really a Loyalty, not a Care, claim. It, in effect, extends Loyalty claims beyond self-dealing. Good Faith claims are something like an intentional dereliction of a duty, or a subjective intent to cause harm to the corporation, or utter failure to try to fulfill a duty, or something. But after Ritter, we know that these Good Faith claims are all just subsets of loyalty.

So, you'll often get facts that look like a really bad Care violation that get made as Good Faith claims instead of Care claims under those theories. Plaintiffs do this because 102(b)(7) and Malpiede v. Thompson lets them pretty much throw out Care claims for damages, so pleading them as Good Faith is the only way to advance a claim that doesn't involve self-dealing.

That sound right?

[apl6783]

Got it. That was actually a really good explanation. Do you mind being on call between now and 3 AM to tutor me through this difficult time in my top-law-schools.com?

Next up, what in the holy hell is the "obgligation/duty of good faith" and why can't courts articulate just what it means? In particular, I'm trying to understand where Ritter/Caremark fit in. I thought Caremark was a Duty of Care case, but I have this dude's outline and he has it listed as "The Intersection of Loyalty and Good Faith." Conceptually I understand Loyalty and Duty of Care, but Good Faith throws it all for a loop in my head.

Is it basically that gross negligence is a Duty of Care claim, and that can be exculpated, while complete abrogation of duties is a more serious thing that shows a lack of Good Faith?

Actually, I don't mind answering questions between now and when I go to bed (which will be midnight-ish). My corps test is Thursday, and I'm studying for it now so this is actually helpful to me too.

As to your question, I'm not sure what you mean. Caremark dealt with breach of duty of care by "failure of oversight." It basically said (I think) that you have to set up a monitoring system to make sure your low level employees aren't doing things that could damage the company badly (committing egregious SEC violations, cutting corners in manufacturing that could result in huge products liability, whatever). How you set the monitoring/information reporting system up, what type of system you use, etc., is a business judgment that we apply the business judgment rule to. But, the system has to have been set up in "good faith," whatever that means.

Essentially, if you're being sued for breach of duty of care and the damage was done because you didn't oversee the company (which is what directors are supposed to do) then you can't raise the BJR defense.

[romothesavior]

The court fucks up in Disney and implies that there is a 3rd duty of good faith (in addition to the duties of care/loyalty) that can be violated independently by a director and serve as a basis for a lawsuit. Ritter clarifies that there is no 3rd "duty of good faith" merely that there is an obligation of good faith that exists underneath both duty of care and duty of loyalty.

The standard for what violates good faith is very high. I have 2 possible breaches of good faith under duty of loyalty: subjective bad faith and intentional dereliction of duty. I don't have any possible breaches of good faith under duty of care (gross negligence doesn't have to do with good faith), but note that a sustained and systematic failure to exercise oversight would be an intentional dereliction of duty (which is a violation of good faith under duty of loyalty).

Okay cool this makes a ton of sense conceptually. Thanks to all three of you who replied.

One further question regarding this:

Caremark dealt with breach of duty of care by "failure of oversight."

How does this square with bk's post? If a "sustained and systematic failure to exercise oversight" constitutes a "dereliction of duty," thereby violating the obligation of good faith under the duty of loyalty, then how is Caremark a violation of the duty of care? This is where I keep getting hung up.

[JusticeHarlan]

In my notes/outline, I have it that Caremark is a Good Faith claim, and therefore Loyalty, only it looks like a Care claim because the factual basis involves a lack of knowing about the goings on of the corporation. In any event, it's supposed to be an extraordinarily hard claim to make.

I'm very open to the opinion that I'm somehow mistaken, of course.

[romothesavior]

In my notes/outline, I have it that Caremark is a Good Faith claim, and therefore Loyalty, only it looks like a Care claim because the factual basis involves a lack of knowing about the goings on of the corporation. In any event, it's supposed to be an extraordinarily hard claim to make.

I'm very open to the opinion that I'm somehow mistaken, of course.

That's how I conceive of it as well at this point, so I hope that's right.

In any case, I think when I take this exam Thursday, I am going to have to employ an old strategy I learned in high school and perfected in college called "winging it." 2Lol

[apl6783]

I'm not sure what the confusion is.

I think that for my purposes I just need to know that Caremark (albeit in dicta) says that the directors must make a good faith effort to implement an adequate system of information reporting so that they know what's going on in the company. Otherwise, they may have breached the duty of care by inaction.

Essentially, if they get sued for breach of duty of care on the theory that their lack of oversight let the ship sink then the court will look at whether they had an adequate reporting system. I think that the question then is whether the reporting system was implemented in good faith. If it was, then how it was set up is protected by the BJR (court won't second guess the system they used).

There may be more to the case than that. That's all that I need to know for my class though. I'm not sure how the duty of loyalty fits in. THis quote from ritter I found though doesn't make sense - "Where the directors fail to act in the face of a known duty to act (referring to them consciously not having a reporting system or having one but consciously not effectively using it), thereby demonstrating a conscious disregard for their responsibilities, they breach their duty of loyalty by failing to discharge that fiduciary obligation in good faith."

I don't really understand how that'd be a breach of Duty of Loyalty.

[romothesavior]

Yeah apl, that quote from Ritter is what is throwing me off too. It seems to me like Caremark/Ritter make more sense to think of in terms of DoC and not DoL. If you completely neglect to put in any oversight (dereliction of duty), it seems more like a lack of care than disloyalty. But that Ritter quote you just posted calls it loyalty. Who knows.

At the end of the day, I suppose it doesn't matter. Regardless of where you put it, neither one can be exculpated, and the analysis is the same either way.

[apl6783]

We're using the Epstein/Freer book, and it puts it in the DoC section. I'm going with that. Good faith is a contracts thing.

[deebs]

read bainbridge

[booboo]

I'm a lowly 1L taking Corporations but I will still try and help...

We were taught that there are three types of fiduciary duties: duty of loyalty, duty of care, and duty of good faith.

Caremark is a duty of good faith standard that basically instructs corporations that they need to have some sort of oversight function within their organization to ensure that they are acting in compliance with applicable positive law. The other types of bad faith conduct mentioned under good faith in DE cases seem more like duty of care and duty of loyalty claims. However, duty of good faith appears to have been subsumed under duty of loyalty in order to allow the duty of good faith to escape the protections of the BJR.

[bk1]

I'm a lowly 1L taking Corporations but I will still try and help...

We were taught that there are three types of fiduciary duties: duty of loyalty, duty of care, and duty of good faith.

I think this is the key. We all seem to be taught different things. I was taught that there is definitely no duty of good faith.

Above, apl said that BJR does not cover duty of loyalty. In my class we were taught that BJR covers both duty of loyalty and duty of care.

[romothesavior]

read bainbridge

Oh you know it, big guy. I figured you'd be in here dispensing all your corporations knowledge on us.

[booboo]

I'm a lowly 1L taking Corporations but I will still try and help...

We were taught that there are three types of fiduciary duties: duty of loyalty, duty of care, and duty of good faith.

I think this is the key. We all seem to be taught different things. I was taught that there is definitely no duty of good faith.

Above, apl said that BJR does not cover duty of loyalty. In my class we were taught that BJR covers both duty of loyalty and duty of care.

Whoa, really? That seems odd.

[romothesavior]

Above, apl said that BJR does not cover duty of loyalty. In my class we were taught that BJR covers both duty of loyalty and duty of care.

See, I don't see how this is right. The types of Duty of Loyalty breaches we learned were self-dealing, corporate opportunities, and good faith (I guess, if I include it under Loyalty). The BJR doesn't apply to these, except under S 144(a) where the majority of the disinterested directors approve the allegedly self-interested transaction. Very strange.

Or maybe I'm wrong.

[deebs]

read bainbridge

Oh you know it, big guy. I figured you'd be in here dispensing all your corporations knowledge on us.

On the test, I just looked to see what the facts were talking about (enough to see what section of the outline applied) and then just wrote the outline onto the screen. But the chancellor said that good faith was apart of loyalty if I remember correctly, can't actually explain what that is. In basic as basic gets, I understood BJR to be a benefit of the doubt that applies to the directors, and apart of that, they have these duties. If they breach a duty, then the BJR presumption is removed, and they have to overcome it, and I don't remember what happens next. Not sure if that is right, but it gets you a point above median.