7. FIDUCIARY DUTIES

Once the plaintiff shows a conflict of interest, what is the consequence?

(1) The business judgment rule does not apply. (2) The burden usually shifts to the defendant to show that the decision was entirely fair.

What are the three duty of loyalty fact patterns?

(1) competing ventures (2) self-dealing (3) usurpation of a business opportunity

In what types of cases is the business judgment rule irrelevant?

(1) dereliction of duty (2) when directors have a conflict of interest (3) when decisions are made without good faith

What are the two generic ways that a director may breach the Duty of Care?

(1) inattention (2) a decision that results in harm to the corporation

What are the necessary conditions for oversight liability?

(a) the directors utterly failed to implement any reporting or information system or controls or (b) having implement such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention.

What was the continuum of director liability marked out by the Disney case?

At one is breach of the duty of care, which requires gross negligence. At the other is subjective bad faith, which consists of cases in which the director is motivated by a desire to harm the corporation. Between the two is a lack of good faith, which also cannot be exculpated.

Why might self-dealing transactions be good for the corporation?

Because a fiduciary may give her corporation a benefit that it cannot get elsewhere.

Why does involvement in a competing venture implicate the duty of loyalty?

Because operating a competitor cannot qualify as an act taken in a manner the director reasonably believes to be in the best interests of the company.

What is the consequence of a breach of fiduciary duty?

Breach gives rise to a claim by the corporation to recover from the breaching directors for harm caused to the business.

What is the policy tension when a corporation is approaching the zone of insolvency?

Creditors will want the directors to be conservative and to focus on preserving assets. Shareholders will want the directors to be bold to better the company's financial health.

When is the duty of care violated?

Dereliction of duty or when the board makes a decision that results in harm to the corporation.

What is the rationale for the business judgment rule?

Directors are not guarantors of success. They are not liable simply because a decision turned out badly for the corporation.

If a fiduciary prepares to compete, at what point is the duty of loyalty implicated?

If a fiduciary solicits clients or employees while still serving as a fiduciary for Company A.

What would be the consequence of no business judgment rule?

If directors were subject to liability any time a decision turned out badly, directors would rarely take risks. Moreover, qualified people would be dissuaded from accepting directorship positions.

When may a fiduciary get involved in a competing venture?

If she acts in good faith and does not injure the corporation, or if the disinterested directors of the company consent.

How has oversight liability morphed from a Duty of Care claim into a Duty of Loyalty one?

In Caremark, the court stated that where directors fail to act in the face of a known duty to act, thereby demonstrating a conscious disregard for their responsibilities, they breach their duty of loyalty by failing to discharge that fiduciary obligation in good faith.

Assuming that a transaction falls within the statutory definition of self-dealing, how can the transaction be approved by a vote of the disinterested directors?

In Delaware, for disinterested director approval, the conflict of interest and material facts of the corporation must be disclosed or known and the transaction approved by a majority of the disinterested directors (even though the disinterested directors be less than a quorum).

What remedies are available to a corporation when one of its fiduciaries engages in a competing venture?

Injunctive relief to stop the person from competing. A constructive trust on profits made by the fiduciary in the competing enterprise. Damages if the competing venture harmed the corporation in some way.

What is the effect of disinterested director approval?

It invokes the business judgment rule and the burden shifts to the plaintiff to overcome the presumption.

What is the board's decision making function?

It makes decisions for the corporation, such as declaring distributions, recommending fundamental changes to shareholders, issuing stock, and hiring and firing officers.

What was the Caremark holding?

The board of directors must implement reporting or information systems to monitor operations, even in the absence of illegal behavior. The

What does self-dealing refer to?

Transactions entered into by the corporation in which one or more of its fiduciaries has an interest on the other side.

How can plaintiffs defeat the presumption that directors acted with due care?

Usually by showing that the directors acted with gross negligence.

When does the business judgment apply?

When directors make a decision (1) without any conflicts of interest and (2) in good faith.

Under what conditions will an interested director transaction not be set side because of self-dealing?

(1) The transaction was fair to the corporation when entered into. (2) The transaction was approved in good faith by disinterested directors. (3) The transaction was approved in good faith by disinterested directors.

What are examples of a lack of good faith?

(1) acting with a purpose other than that of advancing the best interests of the corporation (2) acting with the intent to violate applicable law (3) intentionally failing to act in the face of a known duty to act, thereby demonstrating a conscious disregard of the director's duties

What is the Delaware approach to usurpation of corporate opportunity?

A corporate officer or director may not take a business opportunity for his own if: (1) the corporation is financially able to exploit the opportunity; (2) the opportunity is within the corporation's line of business; (3) the corporation has an interest or expectancy in the opportunity; and (4) by taking the opportunity for his own, the corporate fiduciary will be placed in a position inimical to his duties to the corporation?

What is the idea behind the Duty of Care?

A director must do her homework and bring to the board the kind of diligence, care, and skill that a person in a like position would be expected to bring.

What does a duty of loyalty violation involve?

A fiduciary with a conflict of interest, which arises when a fiduciary is tempted to put her interest above that of the corporation or shareholders.

What is a fiduciary?

A person who is required to act for the benefit of another person on all matters within the scope of their relationship.

What is the business judgment rule?

A presumption that when directors make a decision, they act "on an informed basis, in good faith, and in the rational belief that the action taken was in the best interests of the company."

What is the classic inattention fact pattern for a Duty of Care claim?

An individual director is derelict.

Why might public policy favor allowing directors to become involved in competing ventures?

Competition is a social good that creates choice and lowers prices for consumers.

Do corporate managers owe fiduciary duties to creditors of the corporation?

Generally, no. Creditors must rely on their contractual rights. However, when the corporation is insolvent, the company's creditors take the place of the shareholders as the residual beneficiaries of any increase in value.

Do shareholders owe the corporation fiduciary duties?

Generally, no. However, when shareholders assume management responsibilities they will owe fiduciary duties to the business.

How did the court define lack of good faith in Disney?

Intentional dereliction of duty or a conscious disregard of one's responsibilities.

How does Delaware define an interested director transaction?

One between the corporation and (1) one or more of its directors, (2) a business or organization in which one of its directors also serves as a director, or (3) a business or organization in which one of its directors has a financial interest.

What is the duty of loyalty?

The duty of loyalty requires that directors act in a manner the director reasonably believes to be in the best interests of the corporation.

What is the board's oversight function?

The board must oversee, or monitor, managers to ensure that those who are making the day-to-day decisions are discharging their duties?

In the face of judicial deference, how can a plaintiff prevail against the business judgment rule?

To establish that the business judgment rule does not apply at all.

What is usurpation of a business opportunity?

When a director takes something that belongs to the corporation, or that should have been offered to the corporation so that the company could decide whether to pursue it.

When is the duty of loyalty implicated?

When a manger has a conflict of interest.