BOD/Officers Duty of Care Flashcards
Gagliardi v. Trifoods International, Inc.
• Facts: SHs Old Ownerbrought a derivative action against Trifoods for recovery of losses sustained by reason of mismanagement unaffected by any direct conflicting interest.
• Holding: To sustain a derivative action from recovery of corporate losses resulting from mismanagement unaffected by directly conflicting financial interests, a SH must plead that a director did not act in good faith and/or failed to act as an ordinary prudent person would have acted under similar circumstances.
o As long as the BOD makes an informed decision in good faith, then they are protected by the Business Judgment Rule.
Only impose sanctions if its grossly negligent
Kamin v. American Express Co. (NY 1976)
Facts: S/H derivative suit against BOD. AMEX BOD acquired $2M Shares of Common Stock from DL Co for $29M. Kamin claims BOD decision to distribute stock as dividend instead of selling at a loss (on the mkt) to obtain tax savings was Corp Waste.
Hold: BOD wasn’t a great decision but it was informed, in GF, did research & determined dividend was best at that time. BJR.
Rule: BJR applies to stupid decisions so long as they are informed and in GF
Reasoning: Efficient. BOD hires experts (considered all the options) & can make stupid decisions and thus are protected. NOTE: DE Ct suspicious of ECMH, everyone can see AMEX owned the stock at a loss. Kaldor-Hicks max wealth & min waste allows for stupid decisions so long as GF, reasonably believe in best interest of Co (even if stupid).
Duty to Monitor: Francis v. United Jersey Bank (NJ 1981)
Facts: NJ Bank suing hapless Ms. Pritchard (now dead) bc she allowed her two sons to run biz into ground by failing to monitor biz.
Issue: When does Director become liable for loss? What does Ct expect Ms. Prichard to do?
Hold: Director becomes liable her when failure to monitor is proximate cause for loss. Court expects her keep informed about activities of Corp, maintain familiarity w financial status, monitoring of biz. She has a DUTY to object, and do whatever in her power to prevent misappropriation of funds. If Corp doesn’t correct behavior, she should resign, report them, and sue.
Rule: Director breaches of Duty of Care by failing to make any decision when reasonable person would. When failure to monitor biz is proximate cause for loss, Director is liable for breach of duty of Care & cannot claim BJR protection.
NOTE: Appropriate response of director is determined on Ad Hoc Basis. Usually close to the line so has to be Case-by-case.
Duty to Monitor: Graham v. Allis-Chalmers Co (Del 1963) [RED FLAG DOCTRINE]
Facts: Derivative action (Co sues BOD & non-director employees). ∆ conspired to fix prices & rig bids w utilities & gov’t agencies. S/H say the BOD should have known based on 1937 decree.
Issue: Did BOD breach duty to monitor business? Is Red Flag Doctrine efficient?
Hold: No. Absent cause for suspicion, no duty to install a Corp espionage system to ferret out wrong-doing. Directors entitled to rely on the integrity of their subordinates until something puts them on notice.
Rule: In the absence of suspicion (Red Flag) no rule of law requires directors to assume, with no justification, that all Corp employees are law violators who, but for a tight check-rein, will give free vent to their unlawful propensities.
Reasoning: BOD could not have known personally all co’s employees, sales ppl (lowest on list) most likely to engage in price fixing, Co is huge, decentralized by delegating authority. Different ppl now than from 1937 when illegal stuff was happening. BOD was convinced it wasn’t happening anymore.
[duty to be informed] In Re Caremark (Del Ch 1996) [Once there is a Red Flag, liability only for systematic failure to monitor]
Facts: Pending settlement of derivative action. Caremark in agmts w hospitals & worried abt kickbacks (red flag). Made a compliance program w 800 # to call in violations, but employees still found breaking the rules. Caremark makes guide to K relationships for employees, puts in control structure, ethics manual.
Issue: Did the directors breach duty of Care by failing to monitor? Did they do ENOUGH?
Hold: settlement is fair & reasonable. BOD not guilty of sustained systematic failure.
Rule: When claim of liability is predicated on ignorance of liability creating activities w.in Corp, only a sustained or systematic failure of BOD to exercise oversight will establish lack of GF
Reasoning: In modern, complex Co’s, BOD must exercise GF judgment that reporting system in concept & design is adequate to assure appropriate info will come in timely manner. Basically, here they tried – they can’t be at fault that the program doesn’t work if they tried to make it work. They WOULD be liable if the program gave them results & they ignored those results (intentional
Stone v. Ritter (Del S. Ct. 2006)
Rule: Caremark Standard articulates necessary conditions for director oversight liability. (1) Directors utterly failed to implement reporting or info systems controls, or (2) having implemented them, consciously failed to monitor or oversee their operations. expanded Failure to Monitor into Duty of Loyalty even if the parties are disinterested (intentional dereliction of duty) Reasoning: You only have liability for intentional conduct. BOD have to have known they were not discharging their fiduciary duties. THIS is why its all brought under Dodd-Frank bc it’s the only way to hold these guys accountable
In re CitiGroup (Del Ch 2009) [failure to monitor biz risks are different from wrongful conduct – that’s just the game, man]
Facts: Derivative suit. S/H sue Citi, failure to monitor worsening conditions & econ problems in subprime lending mkt (red flags). Employees of Citi issued mortgages to ppl w no money, just like the rest of the industry at the time…
Issue: Did BOD breach duty of care by failing to monitor corp’s biz risk?
Hold: No. Mkt crashing not enough of a red flag to know about wrong doing at Citi, no conscious disregard of duty.
Rule: Applied Caremark Standard.
Reasoning: Duty of BOD to monitor biz risk is different from duty to monitor wrongful conduct, bc BOD ALLOWED to take risks! Ct wants BPOS to take risks to max S/H value w.o fear of being personally liable.
Knowing Violation of the law Miller v. AT&T (3d Cir. 1974)
Facts: S/H derivative action. AT&T wiped away DNC debt ($1.5M). Violation of 18 USC §610 (Corp. Campaign Spending.)
Issue: Did BOD breach duty of care (under NY law) by failing to collect $ owed?
Hold: Illegal Acts do not get BJR protection, even if committed to benefit the Corp.
Rule: A KNOWING breach of the LAW is a breach in and of itself. It doesn’t matter if it was good for S/Hs.
