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CASE BRIEF: AIG, Inc. v. Greenberg
965 A. 2d 763 (Del. Ch. 2009)
FACTS: Plaintiff stockholders sued former officers who served on AIG’s board of directors. The
plaintiffs took this action on behalf of the corporation for damages the former officers had caused
AIG by having the corporation engage in illegal acts. The stockholders allege the corporation’s
financial statements over estimated the value of the corporation, inflating AIG’s stock price. AIG’s
Board of Directors formed a special litigation committee (SLC) to look into the allegations, giving full
authority to the committee to address the litigation. AIG decided to join the action as a direct
plaintiff, asserting breach of fiduciary duty and indemnification claims against former CEO
Greenberg and former CFO Smith. The defendants, Greenberg and Smith, contended that the
plaintiffs must make a demand on the full board, and under procedural law, boards of directors
should not be lightly bypassed by derivative plaintiffs.
ISSUE: Did the stockholder plaintiffs have to make a demand on the full board?
REASONING: Corporation law seeks to ensure that boards maintain their right to manage the corporation and
have primacy in decision making. Through the SLC the board asserted control over the lawsuit.
DISCUSSION POINTS: Have the students discuss the AIG, Inc. v. Greenberg case, where stockholder plaintiffs
were excused from making a demand on the full board.
CASE BRIEF: Booth Family Trust v. Jeffries
640 F. 3d 134 (6th Cir. 2011)
FACTS: Shareholders of Abercrombie & Fitch Co. filed a derivative suit on behalf of the company
against several officers and directors alleging that the defendants caused Abercrombie to make
misleading public statements between June 2 and August 18, 2005, which caused stock prices to
rise and then fall once the falsity of the statements were revealed. According to the complaint,
Abercrombie adopted a business model of selling products with a low manufacturing cost at high
retail prices, resulting in a high per-unit margin. The company sought to create such a desired
brand that it could “train” its customers to not expect a sale or markdowns and instead just pay the
high price. This approach manifested itself most particularly in Abercrombie's denim products.
Abercrombie issued reports indicating that its denim sales were strong and that its high gross
margin business strategy was working. The shareholders allege that these statements were
misleading because company insiders knew that Abercrombie was amassing a large surplus of
inventory such that there would have to be dramatic markdowns to clear out the inventory, causing
a negative correction in the company's stock price. The stock price eventually did fall, which kicked
off a spate of lawsuits and regulatory investigations. During this time, when the insiders are alleged
to have known that the price would soon fall, five of the defendants – Singer, Jeffries, Bachmann,
Kessler, and Griffin – sold a large number of their personally owned shares of Abercrombie stock.
The corporation formed an SLC, consisting of board members Allan Tuttle and Lauren Brisky.
During the investigation Mr. Tuttle recused himself from considering claims against Mr. Singer,
Abercrombie’s president, COO and CFO, due to a prior relationship at the Gucci company. The
SLC recommended that the corporation seek dismissal of the suit, and the district court granted a
motion to dismiss. The shareholders appealed.
ISSUE: Did the court defer to the business judgment of the SLC in this case which recommended
that the derivative suit be dismissed?
REASONING: The court of appeals reversed the district court, having serious doubts about Mr. Tuttle’s
independence because he recused himself from considering the claims against the person at the
very center of the alleged improper activity. When Tuttle recused himself from considering the
claims against Singer, he essentially launched a signal flare that he was not independent. Mr.
Singer, as the COO, appears to have been heavily involved in the strategy of touting the success of
the business model to the market. He was also alleged to have engaged in insider trading. Without
a demonstration that its SLC was independent, the corporation’s motion to dismiss based on the
SLC’s recommendation could not be granted.
IV. What is the Liability of Shareholders?
A. Liability of shareholders
Limited liability – to amount invested
B. Ignoring the corporate entity or piercing the corporate veil
1. Shareholders are generally not liable for corporate debt – show the importance of compliance with the
required steps in forming the corporation and starting business with sufficient capital so as to avoid the
2. "Piercing the corporate veil"
a. Failure to maintain records and commingling of funds
b. Grossly inadequate capitalization
c. Diversion of corporate funds
CASE BRIEF: Inter-Tel Technologies, Inc. v. Linn Station Properties, LLC
360 S.W. 3d 152 (Ky. 2012)
FACTS: ITS, Inc., leased a building from Linn Station Properties. Defendants, Inter-Tel, Inc. and
Technologies, Inc., together as ITS’s parent and grandparent, exercised complete control and
dominion over ITS, causing it to lose any semblance of separate corporate existence. Technologies
and Inter–Tel transferred all of ITS’s income and assets to themselves, thus deriving all of the
benefits from the business while leaving behind a shell entity from which a legitimate creditor could
recover nothing when ITS stopped paying rent and went out of business.
ISSUE: Should Linn Station Properties be allowed to pierce the corporate veil of the defendants?
REASONING: To pierce the corporate veil, courts require there to be domination and the existence of an injustice.
Here the defendants derived all the benefit from ITS and exercised complete control and dominion
over the company. Under these circumstances there was the requisite domination and injustice to
justify piercing the corporate veil to hold both Technologies and Inter-Tel responsible for the default
judgment previously obtained by Linn Station against ITS.
3. Functional reality – alter ego
4. Obtaining advantages of corporate existence
C. Exceptions to limited liability
1. Wage claims
CASE BRIEF: Hanewald v. Bryan’s, Inc.
429 N.W. 2d 414 (N.D. 1988)
FACTS: On July 19, 1984, Keith and Joan Bryan incorporated Bryan’s Inc. The corporation was authorized
to issue 100 shares of stock with a par value of $1,000 per share. The corporation issued 50
shares to Keith and 50 shares to Joan, although it did not receive any payment in labor, services,
money, or property for the stock. On August 30, 1984, Bryan’s Inc. bought Hanewald’s dry goods
store, giving him a promissory note for part of the purchase price. The business was not
successful, and after four months, Keith and Joan Bryan decided to close the store. They
disbursed all the corporation’s funds in payment of all bills except for the debt owed Hanewald.
There were no corporate funds available to pay this debt. Hanewald sued the Bryans individually
for the amount owed. The Bryans contended that they were not personally liable for the
corporation’s debts.
ISSUE: Is there personal liability for nonpayment of stock?
REASONING: Organizing a corporation to avoid personal liability is legitimate and a primary advantage to doing
business in the corporate form. But proper capitalization is the principal prerequisite for this limited
liability. Keith and Joan Bryan’s failure to pay for their stock makes them liable to Hanewald, the
corporate creditor, to the extent that the stock was not paid for. Because the debt to Hanewald,
$36,000, was less than the par value of their stock, $100,000, the Bryans are personally liable for
the entire corporate debt owed to Hanewald.
D. The professional corporation
1. Limited liability depends on state law
2. Act of shareholder in creating liability – usually, a shareholder must hold a license
3. Malpractice liability of an associate
ANSWERS TO QUESTIONS AND CASE PROBLEMS
1. Demand futility in shareholder derivative lawsuits. The case was dismissed because Beam failed to particularize
facts demonstrating presuit demand futility raising reasonable doubt that a majority of the outside directors were
2. Stockholder derivative actions. Judgment for the corporation. If any injuries occurred, they occurred to all the
shareholders alike. And such is precisely the situation in which a derivative action is required. However, the
A plaintiff-shareholder does not have an independent cause of action where there is no showing that he has
been injured in any capacity other than in common with all other shareholders as a consequence of the wrongful
actions of a third party directed towards the corporation. Every one of the other 100 shareholders was similarly
The Westons could have plead a derivative action if what they sought was to hold the directors and CFIS
responsible for some alleged wrong. Instead they sought a direct cause of action. The Westons may have
sought personal claims against the defendants, so that any judgment in their favor would be awarded directly to
In essence, the Westons could have filed a derivative suit but didn’t and the court is aware of the selfish motives
for this failure to assert this claim. The court notes that the Westons did not have a direct cause of action
3. Shareholders actions. Judgment for Hubbard. Shareholders of a corporation may not maintain actions in their
own names to redress an injury to the corporation even if the value of their stock is impaired as a result of the
4. Shareholder of record. Judgment for Altec. Section 8 of the UCC permitted Altec to treat Equivest as the owner of
the 700 shares because it was the registered owner according to Altec’s corporate books. Hoffman and Erikson
5. Restrictions on transfer of shares. Judgment for the shareholders. A transfer restriction is not binding unless it is
conspicuously noted on the share certificate or it is known by the transferee. In this case, the restriction was not
6. Limited liability of corporate shareholders; incorporation for the express purpose of obtaining limited liability.
7. Inspection of corporate books. Judgment for U.S. Die. Section 220 proceedings are an important part of the
corporate governance landscape in Delaware. Stockholders have a right to at least a limited inquiry into books
and records when they have established some credible basis to believe there has been wrongdoing. Slyman
testified that he wanted to inspect the books because:
I would like to make my own decision as to why the merger was not completed. Telling me that it was a
difference of philosophies didn’t get me to understand why it was not completed. The philosophy was
there prior to it . . . .
The Court of Chancery found the defendant’s reason suspect because management philosophies could have
been researched before entering into the agreement. Expense payments made to Mid Am in excess of the
8. Majority shareholder conduct oppressive toward minority. Judgment for Marty and Larry. It was wasteful to the
corporation and oppressive to the minority shareholders for Ken and Charlotte to take salaries in excess of
9. Limited liability of corporate shareholders. The evidence supports the conclusion that NDC and Sunstates were
instrumentalities of Engle and that their remaining assets were diverted by him. All of the corporations under
10. Piercing the corporate veil. The court disregarded the corporate entity in this case. The corporate veil will be
pierced, even though corporate formalities had been observed and individual property had been kept separate.
Applying the ethical principles set forth in the Preface leads to the same conclusion as the one breached by the
court in this case. While it is ordinarily not unethical to seek limited liability by using the corporate form of
Authors' Comment: Ask your class why Sporting Goods, Inc., should have won this case. As a result of the
court's judgment, Klein must personally pay $231,484.60 to Sporting Goods, Inc. However, Klein had no
11. Basis for refusing to issue duplicate share certificate. Yes. UCC § 8-405 specifies the limitations on the right to
the issuance of a new certificate. The owner’s negligence is not stated as a ground for refusing to issue a new
12. Bonds. Alec is incorrect. The security is a form of bond called a debenture. The rights and obligations of the
issuer and the holders were set forth in an indenture agreement. Such an agreement contains the contractual
terms of a particular bond issue. And because the bond is unsecured, it is called a debenture. The interest rate of
13. Mechanics of transfer of shares. No. In order to effect a transfer of shares of stock, there must be either a
delivery of the share certificate properly indorsed or a delivery of the share certificate accompanied by an
Authors’ Comment: For an advanced section, the point can be made that here the social force of enforcing the
intent of the parties has been defeated. There is no question that a transfer of the shares was in fact intended.
Why does the law not give effect to that intent and overlook the fact that the bill of sale was given as being a
“mere irregularity”? The answer is that the desire to enforce the intent of the parties is outweighed by the desire
By reducing the formality standards, which the court refuses to do, it would become possible for a fraudulent
claimant to seize on various letters, memoranda, or statements of intent and claim that they constituted transfers
By refusing to make any exceptions to the statutory requirements, the court avoids all the above dangers.
14. Malpractice liability in a professional corporation. Judgment against Birt as to the other defendants. These other
defendants had not rendered services to the plaintiff. The fact that they were part of a corporation did not impose
15. Inspection of books. Judgment for Naquin. Because Air Engineered attempted to buy him out at a price he
thought inadequate, Naquin had the right to examine the corporation’s financial records so that he could
LAWFLIX
Meet Joe Black (1998) (PG-13)
A transfer of corporate control and the role of shareholder control is at the heart of this film about a corporation under
takeover fire.
To access additional videos that illustrate business law concepts, visit www.cegage.com/blaw/dvl.
management system for classroom use.
