article 1.2 Flashcards
Duty to care
the standard to care is an objective on enearly everywhere. A director cannot excuse herself by pointing to a personal lack of knowledge or experience.
The general duty of care is concretized by case law and legal commentaries in each of the jurisdictions. This could lead to the impression that liability of directors for violating their duty of care in one of its many concrete forms is a great risk and would lead to many court cases. Yet, in practice the number of cases in which directors are actually held liable for violation of their duty of care is very small. A major factor explaining this result is de iure or de facto the business judgement rule. T here is no violation of the duty of care if the director who makes a business decision may reasonably believe that he or she acts, on the basis of adequate information, in the interest of the company. This leads to many difficult interpretation problems. Therefore, the business judgement rule gives them a safe haven
Limits of the “safe haven”
the most important constraints are the rather strict informational duties. The ensure that they receive adequae information, directors must meet increasingly severe organizational standards. Furthermore, far reaching documentation duties may come into play where judges are less fond of the “business judgement rule” idea than academics
The requirements of the duty of care ris dramatically if the company runs into difficulties and financial distress. Not only must the board become more active to solve the difficulties or to negotiate a work out before falling into outright insolvency, the board must also inform the shareholders
Conflicts of interest: while the duty of care circumscribes the general professional behavior of the directors, there are special situations in which the directors may be tempted under particular circumstances not to act in the interest of the shareholders.
here the duty of loyalty comes into play. The temptation not to act in the interest of the shareholders is particularly strong if there is a conflict of interest between the interest of the shareholders and of the directors themselves, or third parties with whom the directors have close relations or owe conflicting duties.
This strong principal agent confict between the shareholders and the board is addressed in all jurisdictions, but what exactly they consider to constitute a conflict of interest varies considerably. The techniques for dealing with conflicts of interest also differ widely. The traditional rule is to try to avoid the conlfice of interest at all, such as by a substantive prohibition rule. Such a strict prohibition or exclusion of conflict of interest is not practicable; therefore, procedural techniques have been developed. As a minimum, conflicts of interest have to be disclosed. Yet mere disclosure is usually considered insufficient.Authorization of potentially conflict triggering acts may be required.
There are three categories of conflict
Related party transactions: the appropriation of corporate opportunities by a director as well as securities transactions by a director on the basis of inside information obtained from the company
Corporate opportunities: The director takes away from the company and diverts to himself a business opportunity that “belongs” to the company. The conflict of interest thus arises out of the prior analytical step of characterizing the business opportunity as a corporate one. Among the conflict of interest situations, it is the clearest case of misappropriation or even outright “theft” by the director
Inside information: today, board members - like many other persons inside and outside the company - are prohibited form using inside information in the context of acquiring or disposing of financial instruments to which that information relates for their own account or for the account of a third party.
Enforcement
Liability rules are only as good as their enforcement, and in all european jurisdictions levels of private enforcement of such rules are low. The crucial issue concerns the incentives for, and abrriers to, litigation on the part of non-controlling shareholders. The board is unlikely to initiate litigation, although it may do so if it is a new board installed after the sale of the company
A controlling shareholder may be implicit in the breach of duty or, if not, the board may have other remedies at its disposal, so that it will not be interested in securing a decision from the general meeting to sue the directors. As a result, where there is a controlling shareholder, initiation of a lawsuit by a minority shareholder against the directors constitues a form of minority shareholder protection
Where shareholdings are dispersed, the inherent collective action problems of the shareholders may prevent the general meeting from taking action. Here, enforcement of the directors duteis by minority shareholder may protect the shareholders as a class against management
Thus in both types of shareholding structure, it is significant whether a minority shareholder is in a position either to act on behalf of the company to enforce its rights (the “derivative” action) or cause the company itself to act to enforce its rights. Minority shareholder action refers to both types of action. IN all jurisdictions there are still considerable obstacles to minority shareholder cations
in the past law makeers have been suspicious of the motives of minority shareholders with only limited stakes in the company, who wish to see the companys rights enforced . Legislatures have therefore set strict standing rules, usually expressed in terms of a percentae of the companys equity, for access to the minority suit
In some jurisdictions, the cost rules are a big disincentive. If the suing shareholder bears the costs of the litigation but recovery is by the company, this creates a strong disincentive to litigation, especially if the cost rule stipulates that the loser pays the winners costs. However, the cost disincentive is not present in all jurisdictions. If the minority shareholders action forces the company to litigate, the costs will fall on the company
The effort falls on the minority shareholder but the recovery goes to the company so that the shareholders benefits only to the extent of their limited interest in teh capital of the company. Contrary to the traditional view, therefore, the problem may not be that minority shareholders are overly motivated to sue but rather the opposite is true.
The board of non employee and non shareholder stakeholders
stakeholders other than employees and creditors are usually not protected by board ruls and comppany law but by other provisions, in particular disclosure and social accounting rules. STill, in some countries that provide for a stakeholder-oriented approach, the board has to consider, as a matter of law, not only employees and creditors interests, but more broadly the interests of other stakeholders and the “Public interest<”>. Since stakeholders do not have rights to enforce restrictions against the board, the actual impact of these rules is limited, though the trend is to put more teeth into these requirements
