Business Associations - shareholders, derivative suits, business judgment rule, fiduciary duties Flashcards
What right does a shareholder acting in good faith have regarding corporate records?
The right to make a written demand to inspect and copy the corporation’s books and records
Under the MBCA, the demand must provide the corporation with five days notice.
What types of records can a shareholder inspect without stating a particular purpose?
- Articles of incorporation
- Bylaws
- Most recent annual report
- Any written communications to shareholders within the past three years
- Minutes of the shareholder meetings
A demand for these records does not need to state any particular purpose.
What must a demand for copies of other corporate records include?
It must state a particular purpose and describe the purpose and relevant records
The records must be directly related to the shareholder’s purpose.
What is a proper purpose for a shareholder to inspect corporate records?
One reasonably related to the shareholder’s interest as an equity stakeholder in the corporation
An example is a desire to determine whether improper transactions have occurred.
What is a derivative suit?
Where a shareholder asserts a claim against the corporation’s directors to protect the corporation from mismanagement or harm
The claim is typically brought because the corporation has neglected to assert it.
On whose behalf does a shareholder assert a derivative claim?
- The corporation itself
- The shareholders at large
This is usually because the corporation has neglected to assert the claim.
What can a corporation do if a shareholder brings a derivative suit?
The corporation may move to dismiss it if maintaining the suit is not in the corporation’s best interests.
The court must dismiss the suit based on a good faith determination by the corporation.
What is required for a good faith Determination?
A quorum of independent directors or a committee consisting of 2 or more independent directors
What should the board’s decision to dismiss have?
Some factual support in its inquiry’s findings
A reasonable inquiry does not require a full-blown investigation
This ensures that the dismissal is based on reasonable grounds.
Does a reasonable inquiry require a full-blown investigation?
No, a reasonable inquiry does not require a full-blown investigation
inquiry should be thorough enough to support the board’s decision.
Who qualifies as an independent director?
- Has no material interest in the proceedings outcome
- Has no material relationship with anyone who has a material interest in the outcome
- No material stake in the litigation affecting impartial judgment
A director who may be held liable for a breach of fiduciary duty is not considered independent.
What fiduciary duties do directors owe to the corporation under the duty of good faith?
- Duty to act in good faith, including:
- Acting on any red flags of corporate illegality
- Establishing procedures for business compliance with legal norms
This includes reporting systems providing information on compliance and performance.
What does the business judgment rule provide for directors?
It provides a defense for directors who allegedly breached the duty of care.
The court will presume the director acted
in good faith
upon reasonable information
in the honest belief that the decision was in the corporation’s best interest
Unless rebutted a director isn’t liable for breaching the duty of care based on honest mistakes or poor business judgment. The rule prevents a court from second-guessing a director’s reasonable business decisions, even if they turn out to be bad ones.
The Business judgment rule does not apply where
breach of duty of good faith or loyalty, showing of illegal conduct, or decisions made in a fiduciary’s own self-interest
The rule does not shield directors from these situations.
Fill in the blank: Directors cannot undertake knowingly ______ conduct, even if it benefits the corporation.
[illegal]
This is part of their duty to act in good faith.
