Corporate Fiduciary Duties

Duty of Loyalty:

Candor Undisclosed conflicts of interest Taking advantage of a corporate opportunity

(3) BJR is rebutted where the decision

Lacks a business purpose; Is tainted by conflict of interest or is otherwise self-interested; Is so egregiously bad that it amounted to a no-win decision (very rare); or Results from a conscious failure to exercise oversight and supervision.

Two types of due care

(1) Procedural due care - the process used in reaching a decision rational; (2) Substantive due care [We hear about this but most believe this has been rejected in Delaware] - was the actual decision substantively rational?

Bad faith

1. intentional dereliction of duty 2. conscious disregard for one's responsibilities 3. Deliberate indifference and inaction in the face of a duty to act

Conflicts of interest

: Delaware gen corp laws 144 provides a safe harbor for when a transaction involves self-dealing if the material facts as to the director's relationship or interests as to the contract or transaction are disclosed or are known to the board of directors (must be informed), and the board in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors or disinterested shareholders.

Secret profits

A servant is accountable to his master for profits he obtains because of his position, if the servant takes advantage of his position and violates his duty of good faith and honesty to make the profit for himself.

Oversight

Absent cause for suspicion there is no duty upon the directors to install and operate a corporate system of espionage to ferret out wrongdoing which they have no reason to suspect exists."

Caremark

Caremark articulates the necessary conditions predicate for director oversight liability: (a) the directors utterly failed to implement any reporting or information system or controls; or (b) having implemented 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. In either case, imposition of liability requires a showing a conscious disregard by the directors of their duties. However, under FCPA 15 U.S.C. s 78m(b)(2) every issuer of securities which is required to file reports must keep records and devise a system of internal accounting controls. Furthermore, Sarbanes-oxley s 404(a) requires the commission to prescribe rules requiring annual reports to contain internal control reports. You should always have a compliance system in place. However, a close corp can deviate from corporate formalities given the close nature of the organization.

Duty of Care

Directors have the duty to act with the same degree of diligence, care, and skills that a reasonably prudent person would use in similar circumstances, which involves making informed decisions and adequately overseeing the company.

Corporate opportunities

Financial ability, Line of business, of practical advantage, interest or reasonable expectancy (limits the scope of CO), and a conflict between the officers self-interests and his fiduciary duties. Presenting the opportunity to the board creates a kind of "safe harbor", which removes the specter of a post hoc judicial determination that the director or officer has improperly usurped a corporate opportunity, it is not required by law.

Informed decision

In a "best case" scenario, all committee members would have received, before or at the committee's first meeting, a spreadsheet or similar document prepared by (or with the assistance of) an expert. Making different, alternative assumptions, the spreadsheet would disclose the results of each circumstance that might foreseeably arise. One variable in that matrix of possibilities would be the cost to Disney of a non-fault termination for each of the five years of the initial term of the OEA. The contents of the spreadsheet would be explained to the committee members, either by the expert who prepared it or by a fellow committee member similarly knowledgeable about the subject. That spreadsheet, which ultimately would become an exhibit to the minutes of the compensation committee meeting, would form the basis of the committee's deliberations and decision. However, falling short of best practices is not always a breach. You can in good faith rely on reliable reports. They still have to scrutinize them. Can also rely on the board's experience.

Good Faith

Lack of good faith occurs in three situations: (1) Conduct motivated by actual intent to do harm resulting in bad faith: clear liability despite 102(b)(7), (2) Conscious disregard; intentional dereliction of duty resulting in bad faith; no indemnity under 102(b)(7); and (3) gross negligence, no bad intent, which is not bad faith and is protected by 102(b)(7). It is also bad faith to intentionally violate the law. Note that there is good faith, lack of good faith, and bad faith. The failure to act in good faith may result in liability because the requirement to act in good faith is a subsidiary element of the duty of good faith and loyalty. Gross negligence, without more, cannot constitute bad faith. However, the intentional dereliction of a duty, a conscious disregard for one's responsibilities is a non-exculpable, non-indemnifiable violation of the fiduciary duty to act in good faith. It is designed to protect the interests of the corporation and its shareholders where conduct does not involve disloyalty but is qualitatively more culpable than gross negligence.

Duty of loyalty Loic

Requires directors' undivided loyalty and the avoidance of self-dealings (and any conflict of interest), secret profits, corporate opportunities, full disclosure, and good faith.

Duty of loyalty

The duty of a fiduciary to act on behalf of the beneficiary and to place the beneficiary's interests ahead of the interests of the fiduciary. This may be described as a duty to avoid self-dealing or appropriation of opportunities of the principal. (a) The agent is liable to disgorge any/all secret profits obtained from a transaction that breaches the duty of loyalty. (b) If the transaction is a loser, the agent is on his/her own.

De Facto Officer

The following is case law defining the term De Facto Officer. "An officer de facto is one whose acts, though not those of a lawful officer, the law, upon principles of policy and justice, will hold valid so far as they involve the interests of the public and third persons, where the duties of the office were exercised. (This is not real though

Waste

To recover on a claim of corporate waste, the plaintiffs must shoulder the burden of proving that the exchange was "so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration." A claim of waste will arise only in the rare, "unconscionable case where directors irrationally squander or give away corporate assets." This onerous standard for waste is a corollary of the proposition that where business judgment presumptions are applicable, the board's decision will be upheld unless it cannot be "attributed to any rational business purpose." Court held that if there was a legally enforceable contract, then it cannot be waste

Generally

board owes the corporation and each shareholder the fiduciary duties of good faith and fair dealing. Generally, shareholders do not owe each other any fiduciary duties, and may pursue their own personal interests. However, there is a difference when a stockholder is voting strictly as a stockholder and when voting as a director. In the latter cases, his vote represents all the stockholders in the capacity of a trustee. When the majority controls the board in a puppet-puppeteer like relationship, it occupies a fiduciary relation towards the minority, as much so as the corporation itself or its officers and directors.

Motives

for causing the action are immaterial unless the plaintiff can show that the action resulted from improper motives and amounted to waste.

DGCL section 102(b

in addition to the matters required to be set forth in the certificate of incorporation by subsection (a) of this section, the certificate of incorporation may also contain any or all of the following matters: (7) A provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director: (i) for any breach of the director's duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under s 174 of this title; or (iv) for any transaction from which the director derived an improper personal benefit.

Parents

owes a fiduciary duty to its subsidiary when there are parent-subsidiary dealings. The standard of intrinsic fairness applies only when the fiduciary duty is accompanied by self-dealing - the situation when a parent is on both sides of a transaction with its subsidiary. Self-dealing occurs when the parent, by virtue of its domination of the subsidiary, causes the subsidiary to act in such a way that the parent receives something from the subsidiary to the exclusion of, and detriment to, the minority stockholders.