Chapter 4 - Business Entities - Fiduciary Duty, Shareholder Litigation, and the Business Judgment Rule
Exculpatory Provision - Limiting Exposure of Directors in - Malpiede v. Townson
"The purpose of this statute was to permit stockholders to adopt a provision in the certificate of incorporation to free directors of personal liability in damages for due care violations, but not duty of loyalty violations, bad faith claims and certain other conduct. Our jurisprudence since the adoption of the statute has consistently stood for the proposition that a Section 102(b)(7) charter provision bars a claim that is found to state only a due care violation.
Corporate Opportunity Doctrine: MBCA Approach (SAFE HARBOR THEN COMMON LAW) § 8.70. BUSINESS OPPORTUNITIES
(a) A director's taking advantage, directly or indirectly, of a business opportunity may not be the subject of equitable relief, or give rise to an award of damages or other sanctions against the director, in a proceeding by or in the right of the corporation on the ground that such opportunity should have first been offered to the corporation, if before becoming legally obligated respecting the opportunity the director brings it to the attention of the corporation and: (1) action by qualified directors disclaiming the corporation's interest in the opportunity is taken in compliance with the procedures set forth in section 8.62, as if the decision being made concerned a director's conflicting interest transaction, or (2) shareholders' action disclaiming the corporation's interest in the opportunity is taken in compliance with the procedures set forth in section 8.63, as if the decision being made concerned a director's conflicting interest transaction; except that, rather than making ''required disclosure'' as defined in section 8.60, in each case the director shall have made prior disclosure to those acting on behalf of the corporation of all material facts concerning the business opportunity that are then known to the director. (b) In any proceeding seeking equitable relief or other remedies based upon an alleged improper taking advantage of a business opportunity by a director, thefact that the director did not employ the procedure described in subsection (a) before taking advantage of the opportunity shall not create an inference that the opportunity should have been first presented to the corporation or alter the burden of proof otherwise applicable to establish that the director breached a duty to the corporation in the circumstances. Section 8.70 provides a safe harbor for a director weighing possible involvement with a prospective business opportunity that might constitute a ''corporate opportunity.'' By action of the Board of Directors or shareholders of the corporation under section 8.70, the director can receive a disclaimer of the corporation's interest in the matter before proceeding with such involvement. In the alternative, the corporation may (i) decline to disclaim its interest, (ii) delay a decision respecting granting a disclaimer pending receipt from the director of additional information (or for any other reason), or (iii) attach conditions to the disclaimer it grants under section 8.70(a). The safe harbor granted to the director pertains only to the specific opportunity and does not have broader application, such as to a line of business or a geographic area. The fact intensive nature of the corporate opportunity doctrine resists statutory definition. Instead, subchapter G employs the broader notion of ''business opportunity'' that encompasses any opportunity, without regard to whether it would come within the judicial definition of a ''corporate opportunity'' as it may have been developed by courts in a jurisdiction. If the director chooses not to take advantage of the safe harbor, then the transaction is analysis under the common law fiduciary duty of loyalty analysis. This could mean that the director would be subject to the Delaware approach, the ALI approach, or another approach depending on the jurisdiction.
§ 8.61 Judicial Action
(a) A transaction effected or proposed to be effected by a corporation (or by an entity controlled by the corporation) may not be the subject of equitable relief or give rise to an award of damages or other sanctions against a director of the corporation, in a proceeding by a shareholder or by or in the right of the corporation, on the ground that the director has an interest respecting the transaction if it is not a director's conflicting interest transaction. (b) A director's conflicting interest transaction may not be the subject of equitable relief, or give rise to an award of damages or other sanctions against a director, in a proceeding by a shareholder or by or in the right of the corporation, on the ground that the director has an interest respecting the transaction, if: 164 § 8.61 CORPORATION LAW (1) directors' action respecting the transaction was taken in compliance with section 8.62 at any time; or (2) shareholders' action respecting the transaction was taken in compliance with section 8.63 at any time; or (3) the transaction, judged according to the circumstances at the relevant time, is established to have been fair to the corporation.
§ 8.62 Directors' Action
(a) Directors' action respecting a director's conflicting interest transaction is effective for purposes of section 8.61(b)(1) if the transaction has been authorized by the affirmative vote of a majority (but no fewer than two) of the qualified directors who voted on the transaction, after required disclosure by the conflicted director of information not already known by such qualified directors, or after modified disclosure in compliance with subsection (b), provided that: (1) the qualified directors have deliberated and voted outside the presence of and without the participation by any other director; and (2) where the action has been taken by a committee, all members of the committee were qualified directors, and either (i) the committee was composed of all the qualified directors on the board of directors or (ii) the members of the committee were appointed by the affirmative vote of a majority of the qualified directors on the board. (b) Notwithstanding subsection (a), when a transaction is a director's conflicting interest transaction only because a related person described in clause (v) or clause (vi) of section 8.05(5) is a party to or has 167 MODEL BUSINESS CORPORATION ACT § 8.62 a material financial interest in the transaction, the conflicted director is not obligated to make required disclosure to the extent that the director reasonably believes that doing so would violate a duty imposed under law, a legally enforceable obligation of confidentiality, or a professional ethics rule, provided that the conflicted director discloses to the qualified directors voting on the transaction: (1) all information required to be disclosed that is not so violative, (2) the existence and nature of the director's conflicting interest, and (3) the nature of the conflicted director's duty not to disclose the confidential information (c) A majority (but no fewer than two) of all the qualified directors on the board of directors, or on the committee, constitutes a quorum for purposes of action that complies with this section. (d) Where directors' action under this section does not satisfy a quorum or voting requirement applicable to the authorization of the transaction by reason of the articles of incorporation, the bylaws or a provision of law, independent action to satisfy those authorization requirements must be taken by the board of directors or a committee, in which action directors who are not qualified directors may participate.
Principles of Corporate Governance §5.02 (Related Party Transactions)
(a) General Rule. A director or senior executive who enters into a transaction with the corporation (other than a transaction involving the payment of compensation) fulfills the duty of fair dealing with respect to the transaction if: (1) Disclosure concerning the conflict of interest and the transaction is made to the corporate decisionmaker who authorizes in advance or ratifies the transaction; and (2) Either: (A) The transaction is fair to the corporation when entered into; (B) The transaction is authorized in advance, following disclosure concerning the conflict of interest and the transaction, by disinterested directors, or in the case of a senior executive who is not a director by a disinterested superior, who could reasonably have concluded that the transaction was fair to the corporation at the time of such authorization; (C) The transaction is ratified, following such disclosure, by disinterested directors who could reasonably have concluded that the transaction was fair to the corporation at the time it was entered into, provided (i) a corporate decisionmaker who is not interested in the transaction acted for the corporation in the transaction and could reasonably have concluded that the transaction was fair to the corporation; (ii) the interested director or senior executive made disclosure to such decisionmaker pursuant to Subsection (a)(1) to the extent he or she then knew of the material facts; (iii) the interested director or senior executive did not act unreasonably in failing to seek advance authorization of the transaction by disinterested directors or a disinterested superior; and (iv) the failure to obtain advance authorization of the transaction by disinterested directors or a disinterested superior did not adversely affect the interests of the corporation in a significant way; or (D) The transaction is authorized in advance or ratified, following such disclosure, by disinterested shareholders, and does not constitute a waste of corporate assets at the time of the shareholder action. (b) Burden of Proof. A party who challenges a transaction between a director or senior executive and the corporation has the burden of proof, except that if such party establishes that none of Subsections (a)(2)(B), (a)(2)(C), or (a)(2)(D) is satisfied, the director or senior executive has the burden of proving that the transaction was fair to the corporation. (c) Ratification of Disclosure or Nondisclosure. The disclosure requirements of § 5.02(a)(1) will be deemed to be satisfied if at any time (but no later than a reasonable time after suit is filed challenging the transaction) the transaction is ratified, following such disclosure, by the directors, the shareholders, or the corporate decisionmaker who initially approved the transaction or the decisionmaker's successor.
§ 144 Interested directors; quorum.
(a) No contract or transaction between a corporation and 1 or more of its directors or officers, or between a corporation and any other corporation, partnership, association, or other organization in which 1 or more of its directors or officers, are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the board or committee which authorizes the contract or transaction, or solely because any such director's or officer's votes are counted for such purpose, if: (1) The material facts as to the director's or officer's relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors or the committee, and the board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (2) The material facts as to the director's or officer's relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (3) The contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the board of directors, a committee or the stockholders. (b) Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or of a committee which authorizes the contract or transaction.
§ 8.63 Shareholders' Action
(a) Shareholders' action respecting a director's conflicting interest transaction is effective for purposes of section 8.61(b)(2) if a majority of the votes entitled to be cast by the holders of all qualified shares are in favor of the transaction after (1) notice to shareholders describing the action to be taken respecting the transaction, (2) provision to the corporation of the information referred to in subsection (b), and (3) communication to the shareholders entitled to vote on the transaction of the information that is the subject of required disclosure, to the extent the information is not known by them. (b) A director who has a conflicting interest respecting the transaction shall, before the shareholders' vote, inform the secretary or other officer or agent of the corporation authorized to tabulate votes, in writing, of the number of shares that the director knows are not qualified shares under subsection (c), and the identity of the holders of those shares. (c) For purposes of this section: (1) ''holder'' means and ''held by'' refers to shares held by both a record shareholder (as defined in section 13.01(7)) and a beneficial shareholder (as defined in section 13.01(2)); and (2) ''qualified shares'' means all shares entitled to be voted with respect to the transaction except for shares that the secretary or other officer or agent of the corporation authorized to tabulate votes either knows, or under subsection (b) is notified, are held by (A) a director who has a conflicting interest respecting the transaction or (B) a related person of the director (excluding a person described in clause (vi) of Section 8.60(5)). (d) A majority of the votes entitled to be cast by the holders of all qualified shares constitutes a quorum for purposes compliance with this section. Subject to the provisions of subsection (e), shareholders' action that otherwise complies with this section is not affected by the presence of holders, or by the voting, of shares that are not qualified shares. (e) If a shareholders' vote does not comply with subsection (a) solely because of a director's failure to comply with subsection (b), and if the director establishes that the failure was not intended to influence and did not in fact determine the outcome of the vote, the court may take such action respecting the transaction and the director, and may give such effect, if any, to the shareholders' vote, as the court considers appropriate in the circumstances. (f) Where shareholders' action under this section does not satisfy a quorum or voting requirement applicable to the authorization of the transaction by reason of the article of incorporation, the bylaws or a provision of law, independent action satisfy those authorization requirements must be taken by the shareholders, in which action shares that are not qualified shares may participate.
Statutory Exculpation Provisions, DGCL 102 (b)(7)
(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 § 174 of this title; or (iv) for any transaction from which the director derived an improper personal benefit. No such provision shall eliminate or limit the liability of a director for any act or omission occurring prior to the date when such provision becomes effective. All references in this paragraph to a director shall also be deemed to refer to such other person or persons, if any, who, pursuant to a provision of the certificate of incorporation in accordance with § 141(a) of this title, exercise or perform any of the powers or duties otherwise conferred or imposed upon the board of directors by this title.
In re Walt Disney - Chancellor Chandlor's definition of "good faith"
A fiduciary may be said to have not acted in good faith where there is evidence of intentional dereliction of duty, a conscious disregard for one's responsibilities, is an appropriate (although not the only) standard for determining whether fiduciaries have acted in good faith.
ALI approach (FULL DISCLOSURE IS KEY) Principles of corporate governance §5.05 (Corporate opportunity)
ALI approach (FULL DISCLOSURE IS KEY) Principles of corporate governance §5.05 (Corporate opportunity) (a) General Rule. A director or senior executive may not take advantage of a corporate opportunity unless: (1) The director or senior executive first offers the corporate opportunity to the corporation and makes disclosure concerning the conflict of interest and the corporate opportunity; (2) The corporate opportunity is rejected by the corporation; AND (3) Either: (A) The rejection of the opportunity is fair to the corporation; (B) The opportunity is rejected in advance, following such disclosure, by disinterested directors, or, in the case of a senior executive who is not a director, by a disinterested superior, in a manner that satisfies the standards of the business judgment rule; or (C) The rejection is authorized in advance or ratified, following such disclosure,by disinterested shareholders, and the rejection is not equivalent to a waste of corporate assets. (b) Definition of a Corporate Opportunity. For purposes of this Section, a corporate opportunity means: (1) Any opportunity to engage in a business activity of which a director or senior executive becomes aware, either: (A) In connection with the performance of functions as a director or senior executive, or under circumstances that should reasonably lead the director or senior executive to believe that the person offering the opportunity expects it to be offered to the corporation; or (B) Through the use of corporate information or property, if the resulting opportunity is one that the director or senior executive should reasonably be expected to believe would be of interest to the corporation; or (2) Any opportunity to engage in a business activity of which a senior executive becomes aware and knows is closely related to a business in which the corporation is engaged or expects to engage. (c) Burden of Proof. A party who challenges the taking of a corporate opportunity has the burden of proof, except that if such party establishes that the requirements of Subsection (a)(3)(B) or (C) are not met, the director or the senior executive has the burden of proving that the rejection and the taking of the opportunity were fair to the corporation. (d) Ratification of Defective Disclosure. A good faith but defective disclosure of the facts concerning the corporate opportunity may be cured if at any time (but no later than a reasonable time after suit is filed challenging the taking of the corporate opportunity) the original rejection of the corporate opportunity is ratified, following the required disclosure, by the board, the shareholders, or the corporate decisionmaker who initially approved the rejection of the corporate opportunity, or such decisionmaker's successor. (e) Special Rule Concerning Delayed Offering of Corporate Opportunities. Relief based solely on failure to first offer an opportunity to the corporation under Subsection (a)(1) is not available if: (1) such failure resulted from a good faith belief that the business activity did not constitute a corporate opportunity, and (2) not later than a reasonable time after suit is filed challenging the taking of the corporate opportunity, the corporate opportunity is to the extent possible offered to the corporation and rejected in a manner that satisfies the standards of Subsection (a).
Business Judgment (alternative - can use whichever version we'd like)
Absent evidence of fraud, illegality, conflict of interest, negligence or waste, courts will defer to the business judgment of the Board."
Waste Test (pg. 383)
An exchange that is so one sided that no business person of ordinary, sound judgement could conclude that the corporation has received adequate consideration.
Duty of Care - Caremark
BJR - Presumption - directors, in making a business decision acted on an:(1) informed basis (2) in good faith and in the (3) honest belief that action was taken in the brest interest of the company. ** An extension of 8.30. * Absent an abuse of discretion - judgment will be respected by courts. Director liability for a breach of duty to exercise appropriate attention ma, in theory, arise in two distinct contexts. (1) Such liability may be said to follow from a board decision that results in a loss because that decision was "ill advised" or "negligent". (2) liability to the corporation for a loss may be said to arise from an unconsidered failure of the board to act in circumstances in which due attention would, arguably, have prevented the loss. The first class of cases - typcailly subject to Director-protective business judgment rule, assuming process was either deliberately considered in good faith or was rational. Substantive: Compliance with a director's duty of care can never appropriately be judicially determined by reference to the content of the Board decision that leasds to corporate loss, apart from consideration of teh good faith or rationality of the process employed Whether a judge or jury considering the matter after the fact, believes a decision substantively wrong, or degrees of wrong extending through "stupid" to "egregious" or "irrational", provides no ground for director liability, so long as the court determines the process employed was either rational or employed in a good faith effort to advance corporate interest. Learned Hand's Duty of Care: Whether there was a good faith effort to be informed adn exercise judgment Breach of Duty of Care: In order to show that Caremark directors breached their duty of care by fialign to adequately control Caremark's employees, plaintiffs would have to show either (1) that the directors knew or (2) should have known that violations of law were occuring and, in either event, (3) that the directors took no steps in a good faith effort to prevent or remedy that situation a, and (4) that such failiure proximately resulted in the losses complained of (this last element may be thought to constitution an affirmative defense) Duty of Loyalty: Where directors fail to act in the face of a known duty to act, thereby demonstrating a conscious disregard for the responsibilities, they breach their duty of loyalty by failing to discharge that fiduciary obligation in good faith. Duty to Monitor (test for liability for lack of good faith): A sustained or systematic failure of the board to exercise oversight - such as an utter failure to attempt to assure reasonable information and reporting system exists -will establish the lack of good faith.
Shlensky v. Wrigley
Fundamental in the law of Corporation, the majority of shareholders shall control the policy of the corporation. Director has discretion to consider interests of non shareholder constituencies.
(Sinclair Oil Corp. v. Levien) See Conflicting Interest aka Self Dealing on page 301 w/ Globe Woolen case - see essential fairness test/intrinsic fairness test -
Globe Woolen Co. v. Utica Gas Electric Co: Transactions between corporate and one or more of its directors - voidable only if the transaction or the conduct of conflicted directors was unfair to the corporation. Thus, a conflicting interest transaction would be voided if the substantive terms of the transactions were found unfair, or, even if such terms were found fair, if the benefiting directors had in any way breached their obligation to disclose fully all relevant facts to the corporation, including, of course, the fact of their interest in the subject matter. " He cannot rid himself of the duty to warn and to denounce, if there is improvidence or oppression, either apparent on the surface, lurking beneath the surface, but visible to his practiced eye. " Sinclair Oil Corp. v. Levien - Transactions between the corporation and the controlling person - BJR, otherwise applied, except when the situation involves a parent and a subsidiary, with the parent controlling the transaction and fixing the terms, the test of intrinsic fairness, with its resulting shifting of burden of proof is applied. The standard will be applied ONLY when the fiduciary duty is accompanied by self dealing - situation when a parent is on both sides of the 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 of the subsidiary. As to K in this case w/International, under the intrinsic fairness standard, Sinclair must prove that its causing Sinven not to enforce the contract was intrinsically fair to the minority shareholders.
§ 8.60 Subchapter Definitions
In this subchapter: (1) ''Director's conflicting interest transaction'' means a transaction effected or proposed to be effected by the corporation (or by an entity controlled by the corporation) (i) to which, at the relevant time, the director is a party; or (ii) respecting which, at the relevant time, the director had knowledge and a material financial interest known to the director; or (iii) respecting which, at the relevant time, the director knew that a related person was a party or had a material financial interest. (2) ''Control'' (including the term ''controlled by'') means (i) having the power, directly or indirectly, to elect or remove a majority of the members of the board of directors or other governing body of an entity, whether through ownership of voting shares or interests, by contract, or otherwise, or (ii) being subject to a majority of the risk of loss from the entity's activities or entitled to receive a majority of the entity's residual returns. (3) ''Relevant time'' means (i) the time at which directors' action respecting the transaction is taken in compliance with section 8.62, or (ii) if the transaction is not brought before the board of directors of the corporation (or its committee) for action under section 8.62, at the time the corporation (or an entity controlled by the corporation) becomes legally obligated to consummate the transaction. 157 MODEL BUSINESS CORPORATION ACT § 8.60 (4) ''Material financial interest'' means a financial interest in a transaction that would reasonably be expected to impair the objectivity of the director's judgment when participating in action on the authorization of the transaction. (5) ''Related person'' means: (i) the director's spouse; (ii) a child, stepchild, grandchild, parent, step parent, grandparent, sibling, step sibling, half sibling, aunt, uncle, niece or nephew (or spouse of any thereof) of the director or of the director's spouse; (iii) an individual living in the same home as the director; (iv) an entity (other than the corporation or an entity controlled by the corporation) controlled by the director or any person specified above in this subdivision (5); (v) a domestic or foreign (A) business or nonprofit corporation (other than the corporation or an entity controlled by the corporation) of which the director is a director, (B) unincorporated entity of which the director is a general partner or a member of the governing body, or (C) individual, trust or estate for whom or of which the director is a trustee, guardian, personal representative or like fiduciary; or (vi) a person that is, or an entity that is controlled by, an employer of the director. (5) ''Fair to the corporation'' means, for purposes of section 8.61(b)(3), that the transaction as a whole was beneficial to the corporation, taking into appropriate account whether it was (i) fair in terms of the director's dealings with the corporation, and (ii) comparable to what might have been obtainable in an arm's length transaction, given the consideration paid or received by the corporation. (6) ''Required disclosure'' means disclosure of (i) the existence and nature of the director's conflicting interest, and (ii) all facts known to the director respecting the subject matter of the transaction that a director free of such conflicting interest would reasonably believe to be material in deciding whether or not to proceed with the transaction.
Dodge v. Ford Motor Co.
Purpose of a corporation is to make a profit for shareholders, but a court will not interfere with decisions that come under business judgment of Directors.
Broz v. Cellular Information Systems, Inc. (Delaware Approach - Corporate Opportunity)
See 4 factor test - The Corporate Opportunity Doctrine, as defined in Guth and its progeny, holds that 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 corproation's line of business; (3) the corporration has an interest or expectancy in the opportunity; and (4) by taking the opportunity for his own, the corporate fiduciary will thereby be placed in a position inimicable to his duites to the corporation. The Court in Guth also derived a corollary which states that a director or officer MAY take a corporate opportunity if: (1) the opportunity is presented to the director or officer in his individual and not his corporate capacity (2) the opportunity is not essential to the corporation; (3) the corporation holds no interest or expectancy in the opportunity; and (4) the director or officer has not wrongfully employed the resources of the corporation in pursuing or exploiting the opportunity.
Corporate Opportunity Doctrine: (Guth Test)
The Guth Test: Corporate officer may not take advantage of a business opportunity for himself 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 thereby be placed in a position inimicable to his duties to the corporation. Exception spelled out in Guth: Corporate officer may take advantage of business opportunity if: (1) opportunity is presented to the director or officer in his individual and not his corporate capacity; (2) the opportunity is not essential to the corporation; (3) the corporation holds no interest or expectancy in the opportunity; and (4) the director or officer has not wrongfully employed the resources of the corporation in pursuing or exploiting the opportunity. Two questions to ask when looking at a transaction entered into by a corporate director. Is the transaction a corporation opportunity? Second, is the manager then liable to the corporation for
Duty of Care - Smith v. Van Gorkom -
The business judgment rule exists to protect and promote the full and free exercise of the managerial power granted to Delaware directors. The rule itself " is a presumption that in making a business decision, the directors of a corporation acted on an informed basis in good faith and in the honest belief that the action taken was in the honest belief that the action taken was in the best interest of the company. Thus, the party attacking a board decision as uninformed must rebut the presumption that its business decision was an informed one. The determination of whether a business judgment is an informed one turns on whether the Directors have informed themselves "prior to making a business decision, of all material information reasonably available to them. Representation of the financial interests of others imposes on a director an affirmative duty to protect those interests and to proceed with a critical eye in assessing information of the type and under the circumstances present here. The issue of whether the directors reached an informed decision to sell the Company on September 20 1980 must be determined only upon the basis of the information then reasonably available to the directors and relevant to their decision to accept the Pritzker merger proposal. **Breached Duty of Care: The directors (1) did not adequately inform themselves as to Van Gorkom's role in forcing the "sale" of the Company and in establishing the per share purchase price; (2) were uninformed as to the intrinsic value of the Company; and (3) given these circumstances, at a minimum, were grossly negligent in approving the "sale" of the Company upon two hour's consideration, without prior notice, and without the exigency of a crisis or emergency.
In re Walt Disney Derivative Litigation
The good faith required of a corporate fiduciary includes not only the duties of care and loyalty. A failure to act in good faith may be shown, for instance, where the fiduciary intentionally acts with a purpose other than that of advancing the best interest of the corporation (2) where the fiduciary acts with intent to violate applicable positive law, or (3) where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties.
Brehm v. Eisner
The issue is whether the directors should be held personally liable for a lack of due care in their approval of the agreement ad their waste of corporate assets. (Size and structure of executive compensation are inherently matters of judgment) There was no facts alleged by Plaintiffs that would put into question the Board's independence other than conclusory statements that the Board was beholden to Eisner. It was also acceptable for the Board to rely upon the compensation expert who, at the time, endorsed the agreement. Plaintiffs would have to prove that the Board did not in fact rely on the expert, their reliance was not in good faith or that the expert was not competent. The Plaintiffs did not have a well-pleaded complaint in their argument that the Board committed waste. The waste test would require a transaction so one-sided the it would be irrational to conclude that the corporation received adequate compensation. The court believed that the conduct at issue would not be considered waste under the waste test but still allowed Plaintiffs to amend their complaint. The waste test is also not met on the Defendants decision to make the large non-fault termination payout. Plaintiffs did not set out with particularity facts that would show that no reasonable business person would do so. Concurrence. The concurring judge, Justice Hartnett, believes that Plaintiffs met their burden of fact-pleading to have the case move forward to discovery. Justice Hartnett believes that the burden the majority is placing upon Plaintiffs is too high, especially since many of the facts would only be available through discovery.
Statutory Exculpation Provisions, MBCA 2.02 (b)(4)
a provision eliminating or limiting the liability of a director to the corporation or its shareholders for money damages for anyaction taken, or any failure to take any action, as a director, except liability for (A) the amount of a financial benefit received by adirector to which he is not entitled; (B) an intentional infliction of harm on the corporation or the shareholders; (C) a violation of section 8.33; or (D) an intentional violation of criminal law
Care, Good Faith, and Directors' Oversight Responsibilities, MBCA 8.30, § 8.30 Standards of Conduct for Directors
§ 8.30 Standards of Conduct for Directors (a) Each member of the board of directors, when discharging the duties of a director, shall act: (1) in good faith, and (2) in a manner the director reasonably believes to be in the best interests of the corporation. (b) The members of the board of directors or a committee of the board, when becoming informed in connection with their decision-making function or devoting attention to their oversight function, shall discharge their duties with the care that a person in a like position would reasonably believe appropriate under similar circumstances. (c) In discharging board or committee duties a director shall disclose, or cause to be disclosed, to the other board or committee members information not already known by them but known by the director to be material to the discharge of their decision-making or oversight functions,except that disclosure is not required to the extent that the director reasonably believes that doing so would violate a duty imposed underlaw, a legally enforceable obligation of confidentiality, or a professional ethics rule. (d) In discharging board or committee duties a director, who does not have knowledge that makes reliance unwarranted, is entitled to rely on the performance by any of the persons specified in subsection (f)(1) or subsection (f)(3) to whom the board may have delegated, formally or informally by course of conduct, the authority or duty to perform one or more of the board's functions that are delegable under applicable law. (e) In discharging board or committee duties a director, who does not have knowledge that makes reliance unwarranted, is entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, prepared or presented by any of the persons specified in subsection (f). (f) A director is entitled to rely, in accordance with subsection (d) or (e), on: (1) one or more officers or employees of the corporation whom the director reasonably believes to be reliable and competent in the functions performed or the information, opinions, reports or statements provided; (2) legal counsel, public accountants, or other persons retained by the corporation as to matters involving skills or expertise the director reasonably believes are matters (i) within the particular person's professional or expert competence *161 or (ii) as to which the particular person merits confidence; or (3) a committee of the board of directors of which the director is not a member if the director reasonably believes the committee merits confidence.
§ 8.42 Standards of Conduct for Officers
§ 8.42 Standards of Conduct for Officers (a) An officer, when performing in such capacity, has the duty to act: (1) in good faith; (2) with the care that a person in a like position would reasonably exercise under similar circumstances; and (3) in a manner the officer reasonably believes to be in the bestinterests of the corporation. (b) The duty of an officer includes the obligation: (1) to inform the superior officer to whom, or the board of directors or the committee thereof to which, the officer reports of information about the affairs of the corporation known to the officer, within the scope of the officer's functions, and known to the officer to be material to such superior officer, board or committee;and (2) to inform his or her superior officer, or another appropriate person within the corporation, or the board of directors, or a committee thereof, of any actual or probable material violation of law involving the corporation or material breach of duty to the corporation by an officer, employee, or agent of the corporation, that the officer believes has occurred or is about to occur. (c) In discharging his or her duties, an officer who does not have knowledge that makes reliance unwarranted is entitled to rely on: (1) the performance of properly delegated responsibilities by one or more employees of the corporation whom the officer reasonably believes to be reliable and competent in performing the responsibilities delegated; or (2) information, opinions, reports or statements, including financial statements and other financial data, prepared or presented by one or more employees of the corporation whom the officer reasonably believes to be reliable and competent in the matters presented or by legal counsel, public accountants, or other persons retained by the corporation as to matters involving skills or expertise the officer reasonably believes are matters (i) within the particular person's professional or expert competence or (ii) as to which the particular person merits confidence. (d) An officer shall not be liable to the corporation or its shareholders for any decision to take or not to take action, or any failure to take any action, as an officer, if the duties of the office are performed in compliance with this section. Whether an officer who does not comply with this section shall have liability will depend in such instance on applicable law, including those principles of § 8.31 that have relevance.