978-1305575080 Chapter 44 Solution Manual Part 2

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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.