Duty of Loyalty
Why must a dominant shareholder be subject to the intrinsic fairness test?
Because the SH controls the board--so board ratification is not an appropriate check
Public benefit corporations (B-Corp)
Corporation with a social purpose in its charter Profit making + social purpose If this company is forced to sell, it is able to look at factors outside of just looking at the highest price offered
Court's reading of the safe harbor statute
Delaware courts read the statute to preserve fairness review, even if the transaction falls within one of the categories See Entire Fairness
Why is waiver of opportunity not a bad thing today?
Tech companies want to encourage entrepreneurs to join their boards.
To whom do directors owe a duty of loyalty?
The corporation as a whole.
When do entire fairness situations arise with a dominant shareholder?
When a dominant SH is involved AND the transaction is a merger or another fundamental transaction requiring SH vote.
Revlon Duty
if decision has been made to sell the company, at that time the executives and board have a duty to maximize value for shareholders
Steps for a duty of care case (3)
1. Plaintiff must first show that the directors violated their duty of care. (rebut BJR) 2. This showing shifts the burden to the directors to show a lack of injury to the corporation. 3. Directors meet this burden by showing that a transaction was ok under entire fairness (if waiver need to plead duty of loyalty breach)
Valuation of fair price (2 approaches)
1. Traditional approach: "Delaware Block" (weighted average method of valuation) No longer the exclusive test 2. Liberal approach 262: More of a going concern value based on all relevant factors. (maybe bring in an IB)
Disclosure requirement in conflicted transactions
A failure to disclose alone is a breach of fiduciary duty Even if the transaction is fair, the director must disclose
Duty of loyalty and the BJR (ford case)
BJR - Courts defer to MGMT decisions regarding how best to maximize shareholder value; not decisions regarding whether to maximize shareholder value.
Corporate charitable giving
Generally gets the BJR review; UNLESS 1. Bribery of public officials 2. Donation gives manager or director a kickback
Two standards of review from the Cookies case and the Cooke case for fairness in conflicted transactions
If no controlling SH then BJR (Cooke) If controlling SH then entire fairness (Cookies)
Why don't we eliminate all self-dealing transactions?
May prevent a mutually beneficial opportunity
General explanation of the duty of loyalty
Only arises when there is a potential conflict of interest prohibits directors and officers from benefiting personally from business transactions. Must all be to advance the interests of the company. Need to limit director or officers who have a personal financial interest in transactions
Elements guiding conflicted transactions under the Duty of Loyalty (3)
1) Fully disclose all material facts 2) Deal with the company on terms that are intrinsically fair in all respects 3) May not deal with the corporation in any way that benefits themselves at the corporation's expense
Multi factor fairness test for corporate opportunity (4)
1) How a manager learned of the disputed opportunity 2) Whether he or she used corporate assets in exploiting the opportunity 3) Fact-specific indicia of good faith and loyalty to the corporation 4) Corporations line of Business
When is a transaction subject to the intrinsic fairness test? What test is applied?
1) The party organizing the transaction has a fiduciary duty; and 2) This duty is accompanied by self-dealing: The benefit-detriment test: Benefit - The controller receives something, Detriment - To the exclusion of, and detriment to the minority shareholders.
two basic aspects to the "entire fairness" standard of review
1. Fair dealing (procedural)- to include timing, initiation, structure, disclosure, negotiation 2. Fair Price (substantive)- assets, market values, future prospects (Price is the focus in non fraudulent transactions)
What are three scenarios where corporate opportunity becomes an issue
1. Firms with intangible assets 2. Corps with overlapping directors 3. Parent-subsidiary relationships
When is shareholder ratification ineffective? (2)
1. Majority of the SHs are interested 2. Transaction amounts to corporate waste
What are the three tests to determine if an opportunity belongs to the individual or the corporation
1. Traditional test (narrow) 2. Modern test (broad) 3. Multi factor fairness test
BJR in connection with duty of loyalty analysis and controlling SH.
BJR does not apply to a transaction involving a controlling SH ONLY when there is a conflict of interest. Rather than doing a standard duty of loyalty analysis, an intrinsic fairness test is applied
How is corporate opportunity different from self-dealing?
Corp opportunity--corporation is not involved, but the director is taking advantage of his role and position Self-dealing--the corp is a party to the transaction The issue for corp opportunity--was the transaction "interested" in the first place
Uses of a special committee for conflicted transactions and effect on burden
Form a committee of independent and disinterested directors to evaluate a transaction. - Shifts burden of disproving fairness to the Plaintiff.
Wen may a fiduciary take a corporate opportunity?
If a corp has a "financial incapacity" to exploit an opportunity. Fiduciary has the burden of proving the boards decision not to pursue was a genuine business judgment In DE, if presented to the board and declined, then automatic safe harbor
Controlling/dominant shareholders and the fairness standard
In Delaware: Power gives rise to a duty to consider interests fairly whenever entering a contract. Must show the transaction meets the intrinsic fairness test if it's a type of transaction that falls under the requirement
Entire fairness vs intrinsic fairness
Intrinsic fairness is basically dead. Entire fairness reviews substantive fairness (price/terms) like intrinsic fairness, but it also considers the procedural fairness by which the transaction was accomplished
Modern (broad) test for corporate opportunity
Is the project within the corporation's line of business? More dynamic test that folds in the reasonable future trajectory of the corporation's activities, as well as its current ones Permits analysis of both active and passive investing activities Considers how the individual developed the idea and where the information came from.
Corporate Opportunity Doctrine
Limits corporate fiduciary's ability to pursue new business prospects individually without first offering them to the corporation
Defining a controlling shareholder
Majority (50% or more) Ownership in Corporation (with or without control) OR Minority (less than 50%) Ownership in Corporation AND corporate control e.g. musk and tesla
DGCL 144(a)(1) safe harbor statute provisions
Not voidable solely because of conflict of interests if Material facts disclosed; AND 1. Good faith approval by disinterested directors; OR 2. Approval by shareholders; OR 3. Fair transaction (ambiguous)
Shareholder ratification of conflicted transactions and its ties to agency law
Principal can ratify unauthorized acts done by the agent
Shifting of burdens of proof when concerning a dominant SH transaction
Ratification of minority shareholders--burden shifts to plaintiff to show not fair. No ratification--then burden on dominant SH to show it was fair
How Delaware commingles duty of care and loyalty review when adjudicating due care claims against directors
Traditional Approach to the Duty of Care: Plaintiff's Burden to show: 1) Board failed to exercise the appropriate level of care 2) Board's breach actually was the proximate cause of injury to the corporation DE Approach to the Duty of Care: 1. Plaintiff's Burden to prove Board failed to exercise the appropriate level of care, then Judicial determination whether directors breached their duty of care 2. If found to have breached their duty of care, then Director/Defendant's Burden to prove act did not result in a loss/injury to the company (Entire Fairness)
Initial role of safe-harbor statute for self-dealing
Transactions are not voidable solely because there is a conflict of interest
Judicial Review When Transaction has been Approved by a Disinterested Majority of the Board
Under Safe-Harbor Statutes, approval of interested transaction by a fully informed board authorizes the transaction, but it does not foreclose a judicial review of fairness Entire Fairness Review: "Directors who engage in self-dealing [must] establish the additional element that they have acted in good faith, honesty, and fairness."
What is corporate waste?
even a majority vote cannot protect wildly unbalanced transactions that irrationally dissipate assets; Need anonymous vote Consider partnership law and approving extraordinary transactions
Traditional (narrow) test for corporate opportunity
looks to the firm's practical business interest or expectancy, not necessarily its legal interests. A practical look at the corp activities
Eisenberg's critique on "disinterested" directors
never truly disinterested, because the members of the board share so many soft ties with each other.
In re MFW clarity to transaction w/ a majority shareholder
reviewed under the business judgment rule they must BOTH: 1. Be approved by special committee; AND 2. approved by a majority of the minority shareholders...tough to get because many do not vote, which = a no.
Example of a transaction not subject to Benefit-detriment test
the issuance of a normal dividend by a controlling shareholder will never get review because the minority shareholder will always get his pro rata share of the dividend. (would receive BJR--look for waste)