Business Associations - Business Judgment Rule & Fiduciary Duties

Curing a conflicted transaction (DGCL 144)

1. Interested director discloses material facts and a majority of disinterested board members approve, OR 2. Interested director discloses material facts and disinterested shareholders approve it by a vote, OR 3. Contract/transaction is fair to the corporation as of the time it is authorized/approved/ratified

Primary Corporate Purpose

Shareholder wealth maximization!

3 Ways to Show Bad Faith

1. intentional dereliction of duties 2. subjective intent to do harm 3. failure to properly oversee (oversight liability)

Policy Reasons for the Business Judgment Rule

1.) Encourages service on boards 2.) Encourages business risk-taking 3.) Directors are more business-savvy; they're in a better position to make business decisions 4.) Statutory regime: gives responsibility to the directors and not the shareholders. 5.) Directors are accountable to shareholders. Unhappy shareholders can vote directors out of office.

Dominant Shareholders and Duty of Loyalty

BJR is inappropriate where one SH dominates, in cases with Dominant Shareholders, biz jdgmt is evaluated under intrinsic fairness.

Indeminfication (DGCL 145)

Corporation has power to indeminfy dir/emp/off so long as that person: 1. Acted in good faith 2. Acted in a manner he reas. believed to be in best interests of corp. 3. AND (if criminal) had no reason to believe his actions were illegal

Liability insurance?

DGCL 145(g) insurance can be taken out against dir/off/emp/agt liability even if there is no power to indemnify

Corporate Opportunities and Duty of Loyalty

Director/officer must pass on a business opportunity to the corporation, can't take it for himself. Duty evaluated in light of factors (none dispositive): 1. Is the corp financially able? 2. Is the corp in this line of business? 3. Does the corp have an interest/expectancy in the opportunity? 4. Would this create a conflict of interest for director/officer?

Duty of Care: Definition (MBCA § 8.30)

Directors must act: 1.) In good faith 2.) In a manner reasonably believed to be in the best interests of the corporation 3.) With the care that a person in a like position would reas. believe appropriate under sim. circ.

Curing Corporate Opportunity DoL Issues

DoL cured if BEFORE becoming legally obligated, director discloses all material facts he knows and qualified directors disclaim the corporate interest or disinterested shareholders disclaim the interest (basically DGCL 144)

To Whom are Fid. Duties Owed?

Generally, Directors owe them to shareholders and the corporation. Shareholders do not owe duties to each other UNLESS shareholder is dominant SH.

Good Faith "Triad"

Was good faith, loyalty, care, now just loyalty and care. Good faith is infused throughout.

When does BJR not apply?

When P can show: 1. Fraud 2. Illegality 3. Bad faith, waste, or wholly irrational behavior 4. Self-dealing or conflict of interest (loyalty!) 5. Grossly uninformed decision

§ 102(b)(7) cannot eliminate:

a.) Duty of Loyalty b.) Liability for intentional misconduct c.) Liability for unlawful distribution of dividends d.) Liability for unlawful personal enrichment

Director's Responsibilities in General

a.) Have a rudimentary understanding of the business b.) Stay informed about the activities of the corporation c.) Exercise ordinarily prudent care in deciding to act/refrain from acting [d.) Duty to look--can't ignore corporate misconduct]

When must a corp. indeminfy?

Legal expenses when a director successfully defends his conduct on the merits OR when indemnity coverage is agreed upon so long as it agrees with DGCL 145. Otherwise MAY not MUST

Duty of Care for Officers (MBCA 8.42)

1. Good faith 2. With care that a person in like position would reas. exercise under sim. circ. 3. Reasonably believes acts are in best interest of corp 4. Duty includes action to report info material to decisions of superior officer or board, and to report actual or probably breaches of duty or violations of law

Hallmarks of a Fair Transaction (Intrinsic Fairness)

1.) Within the range of terms that parties dealing at arm's length would reach 2.) Made in light of a full and fair disclosure of all relevant facts (defects in disclosure highly relevant, even if within range of terms above)

Business Judgment Rule: Defined

A presumption that in making business decisions, corporate directors and officers (minority: only directors) acted on an informed basis, in good faith, and in honest belief that the action was in best interests of the company

Information directors may rely on

Director can rely on information from officers/employees of corporation whom he reasonably believes are competent, as well as professionally skilled people like lawyers and accountants, or a committee of part of the board of directors.

Director objecting to corporate action (MBCA 8.24)

Director must: 1. Object at beginning of meeting to the meeting itself or doing business at the meeting, or 2. Have his dissent or abstention entered into minutes, or 3. deliver written notice of dissent or abstention to presiding officer before adjournment or immediately afterward

Duty of Loyalty: Definition

Director, officer, and sometimes dominant shareholder's duty not to engage in self-dealing or otherwise use his position to further his own personal interests rather than the interests of the corporation.

Dominant Shareholder

Doesn't need to be more than 50%, can be much less or even more. Control is the factor, not percentage

Two Main Fiduciary Duties

Duty of Care Duty of Loyalty

Oversight Liability ("Caremark Claims")

Establishes director liability for ignorance of liability-incurring activities by "sustained or systematic failure of the board to exercise oversight" such as failing to ensure a reasonable information gathering and reporting system exists (OR "consciously failed to monitor/respond")

DGCL § 102(b)(7)

Exculpatory Charter Provision Allows charters to include limits on monetary liability (injunctions not covered) for breaching duty of care. Can basically eliminate duty of care.

Duty of Care for Officers (minority) (DE)

Officers' duties are identical to directors

Burden of Proof for Duty of Loyalty

P must show a duty of loyalty claim, then burden shifts to D to show intrinsic fairness (under DGCL 144(a)(3)) unless the transaction was ratified (DGCL 144(a)(1) or (2)) in which case burden stays with P

Waste Standard

REALLY REALLY HIGH: a business decision "so one sided that no businessperson of ordinary sound judgment would conclude the corporation got adequate consideration"