BJR, Duty of loyalty, Duty of care

What are the two types of damages for breach of duty of care?

1. A court can enjoin (stop) or remind (undo) an act that violates the boards duty of care. 2. The director may be held personally liable (this may include all directors who assent to the act).

In what 2 circumstances would a self dealing/ self interested transaction be ok?

1. A interested transaction that was objectively fair to the corporation at the time it was entered into. (Even without director or shareholder approval.) or 2. If, there has been a full disclosure of the material facts, and the transaction is approved or ratified by a sufficient number of DISINTERESTED directors or the shareholders. (Meaning they have no ties to the transaction other then working for the corp.)

What are the three most common ways for a director to breach the duty of care?

1. By failing to act 2. Failing to oversee the business; or 3. By misfeasance & malfeasance

What are the choices of remedies for a corporation whose director or officer has usurped their business opportunity?

1. The corporation could seek to have a constructive trust placed on the profits or property involved; 2. The corporate insider may be forced to turn over profits derived from the opportunity; or 3. The corporate insider may be held liable to the corporation for any damages.

What 2 tests are used to determine if a business opportunity belongs to a corporation?

1. The within the corporation's line of business; or 2. Any opportunity the corporation has an "interest or reasonable expectancy" belongs to the corporation.

What 3 requirements must a director or officer satisfy in order to receive the protection of the BJR?

1. They must act in good faith 2. They must act with adequate information 3. They must have a genuine, rational belief that the act taken was in the best interests of the business.

When can a director or officer take advantage of a business opportunity that is within the corporation's line of business, or has an interest or reasonable expectancy in?

1. When the corporation cannot take advantage of the opportunity because of financial or other reasons; or 2. The corporation has rejected the opportunity.

What is an exculpation clause?

A clause in the articles of incorporation, that limits or even eliminates altogether any personal liability for a director's breach of the duty of care. This usually doesn't extend to the duty of loyalty, breaches involving bad faith, or to officers.

What is the duty of loyalty?

A fiduciary obligation that requires the directors, officers, and even majority shareholders (usually majority shareholders, or shareholders in closed corps.) of a corporation to deal with the corporation fairly and without personal financial conflicts.

What does it mean for a director to believe that the act taken was in the best interests of the business. for the BJR?

A subjective standard that the director or officers decision was in the best interest of the business.

What doe it mean if a business opportunity is within the corporation's line of business?

Any opportunity that is directly or functionally related to the corporations existing business.

What is self dealing/interested transactions?

Any transaction or dealing between a corporate insider (director/officer) and the corporation itself, or Any transaction between the corporation and any other person or entity with which the corporation's director or officer has a close personal or financial relationship (BJR won't apply to these types of transactions)

What is the business judgment rule (BJR)?

Directors and officers will be shielded from personal liability for bad decisions which could be seen as a breach of the duty of care, so long as 1. their actions are free from self-dealing, 2. made with sufficient information, 3. rational at the time made, and 4. made in good faith.

What time frame will courts look at to determine if the BJR applies?

From the time decision making process began.

If a decision by a director is not covered by the BJR, when can they be liable?

If in the decision process the director acted intentionally, recklessly, or in a grossly negligent manner. (Normal negligence is not enough)

When will there usually be a duty of loyalty violation?

If the transaction; 1. Involves fraud by corporate insider 2. Involves waste by corporate insider 3. The transaction was clearly unfair to the corporation. 4. There was not a full disclosure before ratification 5. All the directors/officers are interested (in this situation a shareholder will need to bring a derivative action, but will probably not have to make a demand first, then the SLC will determine if they should pursue a suit).

What is the corporate opportunity doctrine?

It establishes a violation of the duty o f loyalty for a director/officer/majority shareholder for taking/usurping a business opportunity that belonged to the corporation in certain circumstances.

What does it mean if a director has failed to oversee the business?

It means that a board member has failed to do things such as 1. failing to install reporting and control systems or, 2. if those systems are in place, "consciously fail[ing] to monitor"

What does it mean if a director has failed to act?

It means that a board member has failed to do things such as 1. learning about the business, 2. attending board meetings, 3. reading the corporation's financial statements and annual reports, 4. and generally paying attention to the business.

What does it mean to act on "an informed basis" as a board member of a corporation?

It means that when looking at a board's decision-making activity and its oversight obligation, 1. that the directors rely, in good faith, on information from trusted sources; 2. A director who has actual knowledge of the facts and circumstances cannot hide behind an expert's incorrect report, however, because such reliance would be unreasonable. (if this is violated look to see if it will pass the BJR)

What is the duty of care?

It the duty owed by directors and officers of a corporation to act (1) in good faith; (2) on an informed basis. and (3) in a manner the director reasonably believes to be in the best interests of the corporation (subjective standard based on the directors abilities)

When a court looks to see if there has been a breach of the duty of care what will they look at?

Like when considering the BJR, courts will generally only look at Courts the adequacy of the process by which the decision was made, not the substance of the decision.

Will the BJR apply to interested transactions that were fair to the corporation?

NO

Can publicly trader companies give personal loans to their directors?

No, only closed corps (and maybe s corps), if it is in the interest of the corporation.

Does the board of directors setting their own compensation count as self dealing/ interested dealing?

No, the BJR will apply unless WASTE can be show.

Under the Delaware law who has the burden of proof to show that an act violated the duty of care owed by a director?

Once the plaintiff shows that a breach has occurred, the director/corporation will need to show that the act was fair.

What opportunities does the corporation have an "interest or reasonable expectancy" in?

Opportunities that the corporate insider learned of during investigation or negotiation on behalf of the corporation.

What does it mean to prove the entire fairness of a transaction?

That even though some part of the BJR was violated, the director will not be held liable if they can show that, considering everything, the transaction was fair.

What happens if one of the requirements isn't met?

The BJR won't apply, and the director will need to prove the demonstrating the "entire fairness" of the transaction.

What will courts look at when determining if the BJR applies?

The court will generally only look at the adequacy of the process by which the decision was made, not the substance of the decision. Unless there is a show of self-dealing, insufficient information, irrational decision, or lack of good faith.

What does it mean if a director has committed misfeasance or malfeasance?

The director has acted in a way that breaches the duty of care (GOOD FAITH) by acting fraudulently or illegally. There may also be a breach of the duty of care when there is self-dealing but it doesn't rise to the level of a breach of the duty of loyalty.

What does it mean to act in "good faith" as a board member of a corporation?

The director must avoid dishonesty, conflicts of interest, and misconduct or illegal activity;

What does it mean for a director to act with adequate information for the BJR?

The director must have considered "all material information reasonably available" at the time the decision was made. (Look at the facts)

What does it mean to act in the "best interests of the corporation" as a board member of a corporation?

The director needs to (subjectively) reasonably believe that they are acting with the corporations best interests in mind (if this is violated look to see if it will pass the BJR)

What if a director or officer is involved in another business opportunity that competes with the corporation before they began their role?

The director or officer needs the approve or ratification from disinterested directors or shareholder provided with all the material information.

Who has the burden if a director is accused of making a interested transaction?

The director or officer who made the transaction will need to show that; 1. the transaction was fair to the corporation when entered; 2. It was approved by the required number of disinterested directors; or 3. The shareholders acting after full disclosure of all material facts, depending on the rules of the state

What happens if an interested transaction is found to violate the duty of loyalty?

The transaction is either reminded or the interested party may be required to pay damages.

What does it mean for a director to act in good faith for the BJR?

They will 1. act honestly 2. avoid self-dealing, 3. avoid conflicts of interest, 4. not commit illegal activity or misconduct

Under the MCBA when will a director be liable for the breach of the duty of care?

When the plaintiff can show that the breach was the cause in fact and proximate cause of the company's loss.