Corporations Page 1 of 58

I. Introduction

*Major question – relationship b/t s/h and ofrs/dirs

A. Trustees of DartmouthCollege v. Woodward, 1819 –

  • Doctrine and Facts: Sees relationship b/t corp and state as a contractual relationship and state c/n change charter unless reserved rights to do so. Distinction in describing the corporation – public/private entity. If public, state has power to regulate. If private, state is very limited.At this time, corps had sort of public role, but court determined still private.
  • Justice Story says much simpler – the funds are private; so the corp is private
  • What is the corporation – artificial person/entity created by the state, fictional entity. Not aggregation of individuals, but created through power of state with group of incorporators. Equates corporations to private property, as long as the source of the funds is private. Trustees work to benefit the corporation, but that is where the interest actually lies.

Shift from viewing corp as sort of entity with public responsibilities to viewing as completely private entity

  1. Corp as fiction – created by state charter, not like an individual
  2. By late 19th C – think about corp as real entity, separate from individual members. This allowed corps to have constitutional rights like free speech. States relaxed charter reqs – easy to incorporate
  3. Turn of 20th C – separation of ownership and control → people come together to invest but others manage. Contractual theory does not really work to explain s/h limited liability to what corp is doing → adopt natural/real entity theory and look at corp as specific particular entity.
  4. 1980s/TODAY – nexus of contracts; rights and obligations among and between s/h, ofrs, dirs, wrks, creditors. More of interaction among all parties, not s/h determine everything. Separation of ownership and control continues. Think about self-protection with contract relationships.

*Corporate law is really about relationships among s/h, ofrs and dirs.

Hierarchy of law : Const → state → articles of the corporation/charter → by-laws of the corporation

Internal hierarchy: S/h/owners → directors → officers

B. Delaware General Corporation Law § 394 – reserve power to amend

C. A Note on Berle and Means, The Modern Corporation and Private Property, 1932

  • Corp as real entity, almost human being; Corporation as public trustees
  • Separation b/t ownership and control → Ownership no longer means control accdg to B&M b/c many passive owners who invested money and gave power to directors to run the corp → directors give power to officers. No longer simple rule from DartmouthCollege – c/n apply traditional property rules to corporations today b/c run for benefit of owners rather than s/h and becomes issue of power – too much power to s/h
  • B&M say despite fact that corp is private created to profit owners, look at as if public entities → not much success after 1960s, 70s. Gradually more about property and contract again rather than power issue.

II. The Rule and Purpose of Corporations

A. General

1. Dodge v. Ford Motor Co., 1919

  • Ford owns 58% and Dodge Bros own 10%. Ford decided to stop special dividends and reinvestment to build smelting plant. Also ↓ed price of cars. Dodge Bros wanted out, but Ford refused to buy their shares. Rule – solely the Dir has power to declare a dividend and determine its amount; courts defer unless the decision to refuse a dividend is in breach of the duty to s/h
  • Court = Ford’s attitude/policy contributed to the policy (a/g interests of s/h and in interest of philanthropic/altruistic concerns). Distinction b/t duties Ford conceives he owes to general public and legal duties owed to s/h → business corp is organized and operated primarily for the profit of s/h and dir are to act toward that end. Corp is property of s/h. But, court does not interfere with expansion plan b/c Ford’s success proves its ability to make good business decisions. Investment in corporation is for the benefit of the s/h. Even with adoption of the plan, the company must pay large dividend to s/h and is allowed to build the smelter plant. Usually court does not interfere at all

2. AP Smith Mfg Co v. Barlow, 1953

  • S/h object to corp donation to Princeton. Reasons for donation – in the public interest, public expects these types of donations, good will in community, favorable community for business, etc. S/h do not argue these justifications, but instead argue that

(1)the certificate of incorp d/n expressly authorize the contribution and common law does not give any implied or incidental power, and

(2)(2) NY statutes that expressly authorize contribution are n/a here b/c passed long after incorporation of AP

  • Common law rule – no philanthropic disbursement of funds unless benefit to corporation. (broadly interpreted). 20th C = more changes as corp dominate economic wealth rather than individuals. Public calls on corp to make donations → courts have interpreted common law broadly to include generic public interest as promotion of corporate objectives
  • NJ statute – history and development. Statute expressly allows philanthropic donations when dir find they will contribute to protection of corporate interests → this does apply to AP b/c original charter reserved power to state to alter/suspend/repeal charter
  • Zabriskie v. Hackensack –Rule – although reserved power permits alterations in the public interest of the contract b/t st and corp, no effect on contractual rights b/t corp and s/h and among/between s/h → courts have since recognized that when justified by public interest, reserved power can be invoked to sustain charter alterations even though they affect the above mentioned contractual rights. Here – public policy reasons for donation outweigh alteration of s/h rights.
  • Decision should have been made in 2 sentences – reserved power to change = ok to change.
  • Why writing all this stuff about social responsibility → what is judge trying to protect? Capitalism and democracy; need charitable contributions to save country. Judge focuses on long history of public benefit – but back then it was so important b/c corporations were for public bridges, etc. Trying to say he would have contributions far beyond this – common law allows and statute also allows, very broad consideration of what it means to benefit the corporation
  • Switch from Dodge – benefiting the corporation rather than s/h. Courts go back and forth over whether the dir management decisions are to benefit the s/h or the corporation

3. Shlensky v. Wrigley, 1968

  • Derivative suit a/g dir for negligence and mismanagement by not having night games at Wrigley Field b/c of concern for the neighborhood, not for profit concern of s/h.
  • BJR favors dirs. Davis v. Louisville – Dir decisions are final unless shown to be fraudulent. Toebelman v. Missouri – authority of directors is absolute when directors act within the law and court cannot substitute judgment. Plaintiff tries to fit in Dodge v. Ford decision – but even there court said no interference with business decision. Court does not say it agrees with decision, but simply that it is proper for the dir to decide and there is no evidence of fraud, etc = court does not interfere.
  • Summary → Black Letter Law = Dirs run the corporations. Directors decide whether to make contributions, etc as long as it benefits the corporation. Distinct from Dodge – court rejected as not in interest of corp reason Ford gave for not paying the dividend

B. Who Counts within the Corporation

1. Steinway v. Steinway & Sons, 1896

  • Corp’s holding of real estate and extensive expenditures to develop it - ∏ says outside the proper purpose of the business and not maximizing profit by all this investment in the community = waste. No fraud charge and question really only about scope of corporate power.
  • At incorporation – purpose was to manufacture and sell pianos and other instruments. Assets included property at Astoria that was purchased with plan/intent to expand/build plant there. At time of incorp, already some manufacturing there. Since then, more factory buildings and improvements made there. Lots of employees live there – corp made expenditures for church, school, library, bath – all in the best interests of the community → the corporation. Basically court supports idea of company town – serves interests of everyone involved
  • General rule – corp must abide by its charter, but difficulty in application – very deferential to corp. Question becomes whether there is a logical relation b/t the act to the corporate purpose as expressed in the charter → very broad and expanding. Distinguishes from past cases that may not have allowed such expenditures by stating that times/businesses have changed. These acts providing for the physical, intellectual and spiritual wants of the employees → there was a close and practical business relation b/t these provisions and the object of corp (keeping workers happy, keeping them close to the business → benefit the corp). Expenditures considered as a whole = directly related to legit objects of corporation. Saying company towns are ok and good idea, the morally right thing to do – What period of time in history – industrialization which can lead to slums, but company towns fight that
  • Thinking of corporations as public entity and should function to benefit the society, duty to give back to the community. Two other aspects → could be that court was upset with suing brother who could have changed in advance, had power to make decisions. And he was also very upset that his brothers were giving away pianos to musicians → waste corporate assets (beneficial business decision)
  • Court recognized Role of the workers – not saying fiduciary duty to workers, but could take into account the interest of the workers for business and moral reasons

2. Simons v. Cogan, 1988

  • Merger terminated right to convert debentures into common stock and eliminated minority stockholders. Nature of debenture interest = long term unsecured debt of the issuing corporation convertible into stock under certain specified conditions. Case law/common law = convertible debenture represents a contractual entitlement to the repayment of a debt and does not represent an equitable interest in the issuing corporation necessary for trust relationship with fiduciary duty
  • Green sees holders of convertible debentures as part of corp community with interests so get fid duty but Court here rejects. Anadarko Petro – mere expectancy interest ≠ fiduciary duty. There must be an existing property right or equitable interest for duty to exist → stock ownership. Before conversion, is a mere creditor protected by the contractual terms of the indenture, but not fiduciary duty. Difference b/t property and contractual relationship – s/h own corporation and bond holders do not. Fiduciary duty goes to property owners.

3. Jedwab v. MGM Grand Hotels, 1986

  • MGM and Bally consider merger agreement that would take all MGM’s presently outstanding stock and convert it into right to receive cash. ∏ owns MGM preferred stock; alleges that merger would breach duty to deal fairly with preferred shareholders. ∏ alleges breach of fiduciary duty → directors have duty in merger transaction to negotiate and approve only a merger that apportions the merger consideration fairly among the classes of the stock. Question whether ∆ owns fiduciary duty to preferred s/h? Is there an additional duty to preferred s/h other than duty to give them the rights, powers and preferences set out in the certificate designating and defining the legalrights? Depends on how articles of incorporation describe the preferred stock.
  • Court = Common law and absent any agreement to the contrary = all shares of stock are equal. Preferred stock includes rights of common stock even if not stated = there is fiduciary duty. Rule – when scope of duty for preferred stock is defined by contract, directors duty is contractual. BUT, when right asserted is not a preference as against cmn stock but rather a right shared equally with the cmn, the existence of such a right and the scope of the correlative duty may be measured by equitable and legal standards
  • How to know when rights fall under cmn stock rights or when fall under contractual rights → everything in common with cmn stock falls under fiduciary duty, but all contractual rights no fiduciary duties. How to know rights of preferred stock → look at articles of incorporation/contract. Who determines what this is → directors. Clear cut test – directors, you owe fiduciary duties to whoever you owe fiduciary duties. And, the scope of your fiduciary duties is what you think the scope of fiduciary duty is, at least in terms of preferred stock. Issue may come down to interpretation of articles of incorporation → Deciding whether falls into equity category or contractual category → that falls to directors to decide and that is what mucks things up

Distinguishing b/t rights of preferred and common. Problem is that directors draw the line between – when it gets to fiduciary duty, directors have power to interpret contract and may take away fiduciary duty to preferred s/h. Start with common → adding some to it = preferred as laid out in contract. Seems to suggest that preferred has more rights than common. Correct, in some cases, but not all. Dividends might be cumulative, suggestive of more rights. That is true to extent of contract. BUT, Jedwab suggests in fiduciary duty, preferred s/h have it only in terms of common stock/equity characteristics → not contractual rights. If contract specifies something about voting – no voting.

4. Connecticut General Statutes Annotated § 33-756 – General Standards for Directors

5. New York Business Corporations Law § 717 - Duty of Directors

B. The Role of the Corporation in Public Life

1. Poletown Neighborhood Council v. City of Detroit, 1981

  • Detroit had plan to acquire by eminent domain if necessary land to convey to GM as site for assembly plant. No dispute about the law → if for a primarily public purpose, taking is fine. If for a primarily private purpose, taking is unconstitutional.
  • Legislature – determined this action meets a public need and serves essential public purpose. Court affords some deference to legislative determination, but not complete. There is a clear benefit to the municipality and court determines it is enough to decide that the legislative purpose was legitimate even though there is also some private incidental benefit. Here, city is using eminent domain primarily to accomplish public purposes of ↓ UE and improving economic base of cmnty → “merely incidental” benefit to private interest. Views corporation/GM as a private entity, but assigns some public role b/c city c/n do alone. GM gets huge benefit from free land →

2. CharterTownship of Ypsilanti v. General Motors Corporation, 1993

  • GM got tax abatements for production in town – then had to consolidate/move the work to a different location due to corporate losses. Trial court held for ∏s on prom estoppel
  • Court rejects trial court – p/e requires actual, clear and definite promise. Reliance reasonable only if there is an actual promise. Big talk by manufacturer with intent to get tax abatement ≠ promise to do something. Even if there was a promise, if was not reasonable for the ∏s to rely on it → lots of statements indicating people knew there was no commitment, no promise, no guarantee of anything. GM did suggest possibility for changes/loss of jobs, etc. It is impossible to predict what will happen to corporation → impossible to make promise. Court stresses that reliance was not reasonable →court begins with equity(P/E) but then moves to focus on contract doctrine/law. Follows tradition – corporation owes nothing to city
  • City can self-protect by contract – but, then question as to whether GM would go to the city/agree to the contract. Not likely that company will agree to a contractual arrangement. And town probably keeps on giving tax break → court telling city that relationship b/t city and corporation are not equal bargaining position. Corporation controls and court gives lots of power to corporation.
  • Message underlies decision– no property interest for cmnty or workers. Corp owe fiduciary duty to s/h, not the cmnty that gave tax breaks.

3. John Doe I. v. Unocal Corp

  • Unocal and human rights violations – how to impose liability on corps; see as indiv or as state.
  • Not barred by Act of State Doctrine – based on notion that courts of one country will not sit in judgment on the acts of the govt of another, done within its own territory → this issue only applies when court must decide effect of official action by a foreign sovereign. 3 factor balancing test from Banco and court here adds a fourth. 1 – international consensus. 2 – implications for our foreign relations. 3 – continued existence of the accused government. 4 – public interest. All but #3 weigh against application of acts of state doctrine → do not apply it here
  • Concurring opinion – this is much simpler. Should just apply federal common law tort principles to find Unocal liable (treat as individual)
  • What is the big deal in corporate law → trying to impose liability on a corporation. Individual can be liable and state can be liable → so what is corporation? Classify as individual or state actor? Say corporation is like an individual and/or a state. Equalize to indiv/state separate from aid/abet. Treat corporation just like individual actor → court has treated corporations as individuals in other context. Can also start looking at relationship b/t corporation and state, corporation as enmeshed with the state/relationship with the state.
  • Here, is corporation more like an individual or more like a state → what requirements of corporation to impose liability. What if corporation benefits from human rights violations → level of sufficiency of knowledge? What about intent – is that required? As in, did corporation intend to commit/allow human rights violations? What if in general corporation simply benefits from human rights violations with no knowledge? Is that enough to impose liability? Some suggest at lowest level, benefit received is enough. Other standards – knowledge, control, aid/abet.
  • Broader question – early 20th C debate over corporation as individual or state. In US law, look at as state. Question of what to do with multinational corporations → can countries regulate or need broader scope of corporate international law. Why not give corporations its own category → really necessary to make into indiv or state. In terms of aid/abet, has separate treatment. Law resents corporation as own category/entity outside traditional categories