Corporate Governance

Standards of Conduct under MBCA

The standards of conduct for directors are set forth in MBCA §8.30.

Rebut the BJR

To rebut the BJR with respect to a board decision, a P must plead and prove a majority of the directors (1) were interested, (2) lacked independence, (3) inadequately informed, or (4) acted in bad faith. The P must show the decision was irrational or constituted corporate waste.

Method of Removing a Director

To remove a director, shareholders generally need to call a special shareholder's meeting or secure the requisite signatures for action by written consent.

MBCA Seeking Money Damages

Under 8.31(b)(1), a P seeking money damages also has to prove that "harm to the corporation or its shareholders has been suffered" and that "the harm suffered was proximately caused by the director's challenged conduct."

Secretary (Officer)

Under both the MBCA and the DGCL, the corporation must designate an officer to prepare and maintain board and shareholder meeting minutes and authenticate the corporate records. This officer is typically given the title of a secretary.

Fiduciary Duties Shareholders

Under corporate CL, a controlling shareholder owes fiduciary duties to the corporation and its other shareholders—primarily the duty of loyalty. It comes into play in the context where a controlling shareholder enters into a transaction with the corporation, i.e. a conflict of interest transaction (America's Mining Corporation).

Straight Voting

Under straight voting, each shareholder may cast the total votes represented by his shares for as many different candidates as there are director slots up for election. One may only cast the maximum number of shares for any one given candidates. Under straight voting, whoever controls the majority of votes selects the board.

Amending Bylaws

Under the MBCA, the default rule for amending the bylaws is that both the board and shareholders have the power to unilaterally amend or repeal the bylaws. This power can be limited or eliminated with respect to the board (but not shareholders) through a charter provision. Under the DGCL, shareholders have the power to unilaterally amend or repeal the bylaws but the board does not. However, a corporation may confer such power to its board through a charter provision.

MBCA and Director Duties

Unlike the DGCL, the MBCA codifies much of director fiduciary duties law.

When the D is independent and disinterested

Where a defendant is independent and disinterested, there can be no liability for corporate loss, unless the facts are such that no person could possibly authorize such a transaction if he or she were attempting in good faith to meet their duty. Where a business decision "was stupid is legally unimportant." (Gagliardi v Trifoods).

Cleansing Device

A cleansing device is approval of a transaction by a fully informed majority of disinterested and independent directors or shareholders.

Conflicting Interest Transactions

A conflicting interest transaction is any transaction between a director and the corporation. The burden is on the director to prove the transaction was fair, both in process and substance to the corporation unless a cleansing device occurred.

Bylaws

A corporation's bylaws specify rules regarding the governance of the corporation, such as notice and quorum requirements for board and shareholder meetings, number and qualifications of directors, voting standards, proxy voting, appointment of officers, and stock certificates.

Line of Business

A corporation's line of business generally includes activities to which it has fundamental knowledge, practical experience and the ability to pursue.

A director may take a business opportunity if:

A director MAY take a business 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 (Broz v Cellular Information Systems).

Usurping a Corporate Opportunity

A director usurps a corporate opportuniry when the director takes for him or herself a business opportunity that should have gone to the corporation.

Board Meeting Requirements

A proper board meeting must have (1) adequate notice, subject to waiver, and (2) a quorum at the meeting.

Annual Shareholder Meeting

An annual meeting is a regularly scheduled meeting held by a corporation each year so that shareholders can vote on the election of directors.

Exculpation Provisions RE

An exculpation provision only relieves directors of being liable for monetary damages, but it does not foreclose equitable relief for a duty of care breach.

Written Consent

As an alternative to a vote a formal shareholder's meeting, corporate law statutes also provide for shareholder approval through written consent.

Drafting Bylaws

Bylaws are generally drafted by an attorney meant to be read and understood by business people unfamiliar with the applicable corporate statute, thus, bylaws will recite a default rule even though it would still apply if omitted.

Cause

Cause generally includes fraudulent or criminal conduct and gross abuse of office amounting to a breach of trust.

Removal of Board

Corporate law statues give the shareholders the right to remove directors at any time, and under the default rule, it can be done with or without cause. It is common for a corporation to add a "for cause" requirement in its charter as allowed by statute.

Where are duties for officers

Corporate law statutes have few specifics regarding officer, leaving it to a corporation to specify the titles and duties of its officers in its bylaws or through board resolution.

Officers

Corporate officers oversee the day-to-day management of the corporation and are elected by the board of directors or appointed by more senior officers. A corporation's bylaws often specify the titles and duties of its officers. Agency law dictates the extent of their authority, as corporate law doesn't say much on the topic.

Disinterested

Disinterestedness goes to whether or not a director or shareholder has an interest in the transaction at issue. The director may NOT receive a personal financial benefit from a transaction not equally shared by the stockholders (Rales).

Fair Dealing

Fair dealing embraces questions of when the transaction was times, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and the stockholders were obtained.

Fair Price

Fair price relates to the economic and financial considerations of the proposed merger or transaction, including all relevant factors such as assets, market value, earnings, future prospects, and any other elements that affect the intrinsic or inherent value of a company's stock.

Where there is a cleansing device

If a cleansing device occurred, the burden then shifts to the plaintiff to prove the transaction constituted waste.

Direct Suit Application

If the P improperly brings a direct suit, the board may move for dismissal arguing it should have been brought derivatively (Tooley). If the Plaintiff wins, the case proceeds. If the Plaintiff loses, they must begin again at step one for the derivative suits.

Step 2 Shareholder Duty

If there is a cleansing device, the burden shifts to the P to prove that the transaction was unfair.

Independent

Independence goes to whether or not a director or stockholder can exercise independent judgment. They must make a decision based on the corporate merits of the subject before the board rather than extraneous considerations or influences (Rales).

Fiduciary Duties of Officers

Officers owe the same fiduciary duties to the corporation as directors. In Delaware, this is pursuant to case law, and under the MBCA, it is pursuant to §8.42.

Special Litigation Committee

Once the shareholder derivative action has commenced, the board forms a special litigation committee (SLC). An SLC is a board committee composed of disinterested or independent directors who determines if the suit is not in the best interest of the corporation and if they should move for dismissal.

Direct Suit

One way for a plaintiff to avoid dealing with the demand requirement, an SLC and other obstacles, is to bring a direct suit. In a direct suit, the plaintiff asserts that he/she was directly harmed by the director's breach of fiduciary duty and therefore is suing in his/her individual capacity for redress of this harm and not on behalf of the corporation.

Duty to Provide Adequate Oversight

Part of a board of director's duties is to monitor, or provide oversight of, the corporation's business. The Plaintiffs must show that the directors (1) knew, or (2) should have known that violations of law were occurring, and the failure to monitor was a sustained and systematic failure, and in either event, (3) the directors took no steps in good faith effort to prevent or remedy that situation and, (4) defendants do not establish affirmative defense that such failure did not proximately result in the loss complained of (Casemark).

Successful Claim for Inadequately Informed

Successfully pleading gross negligence requires the articulation of facts that suggest a wide disparity between the process the directors used to ensure the integrity of the company's financial statements and that which would have been rational.

BJR and Officers

The BJR does not appear to apply to officers under Delaware law or the MBCA. A federal court applying DE law stated that the BJR applies only to directors of a corporation and not to officers, but no DE court has addressed the issue.

Advantage to Written Consent

The advantage to a corporation of using a written consent is there is no notice period required, so the shareholder approval can potentially be obtained much faster and without dealing with the logistics of holding a meeting.

Board is Liable for Failure to Provide Oversight

The board is liable if the directors utterly failed to implement any reporting or information system of controls, of having implemented such a system or controls, consciously failed to monitor or oversee its operation thus disabling themselves from being informed of risks or problems requiring their attention. In either case, imposition of liability requires a showing that the directors knew that they were not discharging their fiduciary duties.

Board Size

The board size is typically specified in the bylaws. Both the MBCA and DGCL allow for boards consisting of single directors. Similarly, neither the MBCA and DGCL do not dictate any qualifications for directors, however the corporation is free to impose them in its charter or bylaws.

Step 1 Shareholder Duty

The burden is first on the controlling shareholder to show the transaction was fair unless there was a cleansing device.

Corporate Governance

The corporate governance structure involves three groups: (1) shareholders, (2) directors, (3) and officers. Shareholders elect the board of directors, the board elects officers, and officers manage the day-to-day affairs of the corporation.

Duties of Directors

The default corporate governance structure is centralized management with ultimate authority vested in its board of directors. This, however, gives rise to the principal-agent problem. To alleviate this risk, corporate law imposes two broad fiduciary duties on directors: (1) duty of care, and (2) duty of loyalty.

Directors

The default corporate law rule is that ultimate managerial authority resides in a corporation's board of directors (also known as "inside directors").

Board of Director Term

The default rule for director terms is that a director's term is generally one year, unless the corporation has opted to stagger its board.

Board Elections

The default rule under the MBCA and DGCL is that shareholders elect directors using straight voting. The voting standard for the election of directors is plurality, thus, if there are three director spots open, the top three vote getters win.

Duty of Loyalty

The duty of loyalty directly addresses the agency-problem and requires a director to act in the best interest of the corporation. The duty of loyalty is implicated in four situations: (1) conflicting interest transactions, (2) failure to provide adequate oversight, (3) failure to act in good faith, and (4) usurpation of a corporate opportunity.

Shareholders

The shareholders are the owners of the corporation who get a say in a limited number of matters expressed through voting.

Adequately Informed

The standard for determining whether a board was adequately informed when making a decision is gross negligence. Gross negligence is a reckless indifference to or a deliberate disregard of the whole body of stockholders' or actions which are 'without the bounds of reason (Van Gorkom).

Who normally fills vacancies

Normally, the board fills vacancies because it is able to call and hold a meeting to do so, or secure the requisite signatures to act by written consent, much quicker than the shareholders are able to do the same. However, it is possible for shareholders to combine the removal of a director and election of someone to fill the resulting vacancy in a single shareholder meeting.

Shareholder Meeting

Shareholder voting is done through a shareholder meeting. There are two types of shareholder meetings: (1) annual, and (2) special.

Evidence for what the Directors knew or should have known

For looking at whether the directors knew or should have known, look to the custom of the trade, business judgment rule, reasonableness, etc.

California Board SIze

Minimum of 3 board members, unless there are 2 or less shareholders.

Sarbanes-Oxley Attempt to Codify Duty

Sarbanes-Oxley attempts to codify the duty of oversight under Section 404 discussing the Management Assessment of Internal Controls. The section requires public companies' annual reports to include the company's own assessment of internal control over financial reporting and the auditor's attestation.

Corporate Duties

There are fiduciary duties imposed on directors, officers, and controlling shareholders of corporations. Corporate duties are judge made, case law under the DLCA, and statutory under the MBCA.

Fiduciary Duty Litigation

There are two ways to sue the board as a shareholder: (1) directly, or (2) derivatively. Deleware asks two questions (a) who suffered the alleged harm, and (b) who will receive the benefit of the remedy decides which way to sue.

Board Action

A board acts through (1) voting at a board meeting, or (2) written consent in which all directors must sign.

Adequate Oversight RE

The board must attempt in good faith to assure that a corporate information and reporting system, which the board concludes is adequate, exists (Casemark).

Exculpation Provision

A breach of the duty of care means the director is personally liable. Because of this risk, DCLA § 102(b)(7) allows for an exculpation provision, which allows a corporation to opt-out of personal liability for the breach of duty of care, in its charter.

Cumulative Voting

A corporation may opt in to cumulative voting under the DGCL and the MBCA. Under cumulative voting, each shareholder may cast in the aggregate on one or more directors a number of votes equal to the votes represented by his shares multiplied by the number of director slots up for election. A voter has no maximum for one vote—a voter can cast all votes for one slot.

Business Judgment Rule

A director is not liable for a breach of fiduciary duty solely on the grounds that he or she made a bad business decision, even if the decision resulted in the demise of the corporation. The BJR 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 best interest of the company (Garliardi v Trifoods Int'l).

A director may not take a business opportunity if:

A director may NOT take a business opportunity 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 expectance 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 (Broz v Cellular Information Systems).

Quorum

A quorum is the minimum number of shares that must be present at a shareholders' meeting. Shareholder voting is based on shares, not a headcount.

Shareholder Derivative Action

A shareholder derivative action is a suit brought by a shareholder on behalf of the corporation to enforce a claim belonging to the corporation.

Represented in the Quorum

A shareholder does not have to physically attend a shareholder's meeting for his or her shares to be considered present for purposes of a quorum and voted. A shareholder may appoint a person who will be attending the meeting to serve as the shareholder's "proxy."

Special Shareholder Meeting

A special meeting is one held between annual meetings to have shareholders vote on a matter or matters that cannot wait until the next annual meeting.

Staggered Board

A staggered board means the terms of only a portion of its directors expire in a particular year. The corporation divides is directors into 2 or 3 classes with one class coming up for election each year.

Filling Vacancies on the Board

A vacancy may occur on a board because of death, removal, or resignation of a director, or also result from an increase in the size of the board. Vacancies may be filled by the remaining directors or by the shareholders.

Futile Demand

In determining the demand futility, to determine whether under the particularized facts alleged, a reasonable doubt is created that: (1) the directors are disinterested and independent, and (2) the challenged transaction was otherwise the product of a valid exercise of business judgment (Aronson).

Liability Shield MBCA

The provision shields a director from such liability if, before taking the opportunity, the director brings it to the attention of the corporation, discloses all material facts concerning the opportunity known to the director, and either a majority of qualified directors or qualified shares disclaim the corporation's interest in the opportunity.

Purpose of BJR

The purpose of the BJR is to protect the board from frivolous suits, as a breach subjects the board of directors to personal liability. The BJR rule prevents a P from prevailing on a breach of a fiduciary duty claim against a board of directors for a bad business decision UNLESS the P can prove that the board's decision-making process was inadequate or tainted.

MBCA and Demand Requirement

The requirement for bringing such a suit are similar to those in DE with the exception of the demand requirement. Under the MBCA, the shareholders must ALWAYS make a demand to the board. The difference is that it will not negatively affect the suit if the board says no if the P's can prove the directors are interested and not independent.

Standards of Liability

The standards of liability sets forth when a director will be liable for failure to comply with §8.30. Under 8.31(a)(2), a P claiming that directors breached their fiduciary duties in approving a transaction has the initial burden of proving the approval process was inadequate or tainted. Unlike DE, overcoming this burden does not shift the D the burden to prove entire fairness.

Fairness

The transaction must be fair in both process and substance. "Directors will be found to have acted with entire fairness where they demonstrate their utmost good faith and the most scrupulous inherent fairness of the bargain (Boyer). Entire fairness has two components: (1) fair dealing, and (2) fair price.

Shareholders Cannot Vote

There are a number of important decisions made by a corporation on which shareholders get no vote, such as whether the corporation should fire its CEO, issue additional shares of stock, go public, borrow money, build a new manufacturing plant, and relocate overseas.

Board Quorum

There must be a quorum present at a meeting for a board to act. The default rule is that a quorum requires the presence of a majority of directors. Both the MBCA and DGCL allow a corporation to lower the board meeting quorum requirement through a bylaws provision to as low as 1/3.

Exculpation Provision and Officers

An exculpation provision can only apply to directors and not officers.

Proxy

A proxy is an agent appointed by a shareholder to whom the shareholder gives express actual authority to vote the shareholder's shares at a shareholders' meeting. Corporate law statutes specify the rules for a valid appointment of a proxy.

Voting Requirements

A voting requirement is the minimum number of votes a matter must receive to pass.

Before Making a derivative claim

Prior to bringing a derivative claim, the shareholder must: (a) make a demand on the corporation's board of directors to pursue the claim, or (b) include in the derivative action complaint particularized facts as to why making a demand would be futile.

Limitations to Shareholders Amending Bylaws

Shareholders can initiate the idea of an amendment in the bylaws. However, this is subject to limitation where changing the bylaws for the cost of an election of board initiated by shareholders, where the court said no because a shareholder cannot step on the rights and duties of the board. (CA, Inc v. AFSCME Employees Pension Plan).

Conflicting Interest Transactions MBCA

Subchapter 8F of the MBCA contains detailed provisions addressing director's conflicting interest transactions in §8.60-8.63.

Committees

Corporate law statutes allow the board to delegate power to committees comprised of one or more directors, and an action properly formed by a board committee is deemed to be an action of the entire board. However, both the MBCA and he DGL prohibit committees from taking certain actions such as amending the corporation's bylaws or approving a matter that requires shareholder approval.

Shareholder Voting

Corporate law statutes provide shareholders may vote on the following matters—(1) election and removal of directors, (2) amendments to the corporation's charter, (3) shareholder (as opposed to board) initiated amendments to the corporation's bylaws, (4) dissolution of the corporation, (5) a merger of the corporation, and (6) a sale of all (or substantially all) of the corporation's assets. The board may choose to put additional matters to a shareholder vote even though it is not required to under state corporate law. A corporation's charter or bylaws may specify additional matters on which shareholders get to vote.

Determining Independence

Financial ties, familial affinity, a particularly close or intimate personal or business affinity, or evidence that in the past the relationship caused the director to act non-independently vis a vis an interested director may be sufficient.

Valid Vote

For a vote at a meeting to be valid, (1) a corporation must provide its shareholders with proper notice of the meeting, subject to waiver, and (2) a quorum of shares must be present at the meeting. A special meeting must also include a description of the purpose or purposes for which the meeting is called.

MBCA Shareholder Derivative Suits

MBCA subchapter 7D addresses shareholder derivative suits.

Series or Class Voting

The issue of class voting arises when a corporation has more than one class or series of stock outstanding. The issue becomes whether all shares vote together as a single class or whether one or more types of shares gets to vote as a separate class. This decision depends on (1) what the corporation's charter says with respect to voting, and (2) the particular matter up for vote, because for some matters the DGCL requires one or more types of shares to vote as a separate class.

Purpose of Exculpation Provision

The corporation itself pays for the breach so people will not be afraid to sit on the board.

Limitations to Amending Bylaws

The court in CA, Inc. v. AFSCME Employees Pension Plan determined that a shareholder may not step on the rights and duties of the board when changing the bylaws. (Tried to change the cost of elections for the board)

Role of the Court with an SLC

The court inquires into the independence and good faith of the committee and if the motion should be granted. The SLC is not given the same presumption of good faith or the business judgment rule as the typical board of directors. If the court denies the motion to dismiss, the case will proceed to trial.

Default Quorum

The default rule under both the MBA and DGCL is that a quorum is a majority of the corporation's outstanding shares.

Duty of Care

The duty of care requires a board to be adequately informed when making a decision (Van Gorkom). The duty of care generally focuses on the decision-making process as opposed to the substance of the decision itself.

Duty of Disclosure

The duty of disclosure obligates directors to provide the stockholders with accurate and complete information material to a transaction or other corporate event that is being presented to them for action. Whenever directors communicate with stockholders they are required to do so honestly.

Duty of Good Faith

The duty of good faith requires true faithfulness and devotion to the interests of the corporation and its shareholders. The duty is breached by: (1) fiduciary conduct motivated by an actual intent to do harm (subjective bad faith) (2) intentional dereliction of duty, a conscious disregard for one's responsibilities (Disney World Case).

Fully Informed

To be fully informed, the directors or stockholders must be furnished all material information concerning the conflicting interest transaction at issue. A fact is "material" if there is a substantial likelihood that a reasonable shareholder or director would consider it important in deciding how to vote (Rosenblatt).

Prong 2 of the Aronson Test

To meet prong two of the Aronson test, a plaintiff has to plead particularized facts creating a reasonable doubt that a majority of the board was (a) adequately informed when making the challenged decision or, (b) honestly and good faith believed that the challenged decision was in the best interests of the corporation.

MBCA Usurping the Corporation

Usurping the corporation is discussed under MBCA §8.70, which provides a safe harbor for a director contemplating taking a business opportunity that may constitute a corporate opportunity and this potentially give rise to a breach of duty of loyalty claim for usurping a corporate opportunity.

Reasoning for a Derivative Suit

When it comes to a breach of fiduciary duty claim against directors, oftentimes it is the corporation, as opposed to its stockholders, that is directly harmed, and therefore the corporation and not its stockholders that has standing to sue. The problem is that the board controls whether a corporation sues, and the board is unlikely to initiate a suit against itself or a subset of directors. So, a derivative suit comes into play.