Chap 8 - Duty of Loyalty Flashcards
What is the duty of oversight?
exercise of a good faith judgment that thecorporation’s information and reporting system is in concept anddesign adequate to assure the board will have the appropriateinformation come to its attention in a timely manner as a matter ofordinary operations
What are the 2 main requirements of the updated duty of oversight?
- make a good faith effort to ensure there are proper reporting systems in place
- take appropriate actions when there are signs of corporate wrongdoing
What is the standard for duty of oversight violations?
The standard of liability applied to oversight cases is “asustained failure” to oversee business affairs (MBCA 8.31;Caremark)MBCA 8.31: A director is liable for:* (4) a sustained failure of the director to devote attention toongoing oversight of the business and affairs of the corporation,or a failure to devote timely attention, by making (or causing to bemade) appropriate inquiry, when particular facts andcircumstances of significant concern materialize that would alerta reasonably attentive director to the need therefore.
What is the duty of loyalty?
is implicated by conflicts of interest. directors must serve the company before their own interests
Are breaches of the duty of loyalty governed by the BRJ?
No! Loyalty violations are judged under the entire fairness standard
What is the holding from In re Caremark International Inc. Derivative Litigation
Sustained or systematic failure of the board to exercise oversight – such as anutter failure to attempt to assure a reasonable information and reporting systemexists is enough to violate the duty of loyalty
What other duty does loyalty include?
Duty of good faith (Disney case)* Bad faith includes1. knowing violations of law,2. intentional misconduct, and3. conscious disregard for one’sresponsibilities
What was the holding in the Disney case?
bad faith* It is more culpable than gross negligence used to determine breach ofthe duty of care* Includes conscious and intentional disregard of responsibilities,adopting a ‘we don’t care about the risks’ attitude (= “intentionaldereliction of duty, a conscious disregard for one’s responsibilities”)* Other strains of bad faith include knowing violations of law andintentional misconduct
What was the rule from Stone v. Ritter?
directors can be held personally liable for breach of duty ofoversight if plaintiff can show either(a) facts indicating that the directors utterly failed to implementany reporting or information systems or controls, OR(b) facts indicating the directors consciously failed to monitor oroversee its operations even though it had adequate reportingsystems in place. (i.e. They ignored the red flags.)
What is the main standard set out in the Disney and Ritter cases?
A sustained failure to oversee operations will breach duty of oversight
What is the old and new rule fro conflict-of-interest transactions within the duty of loyalty
Old - conflict of interest transactions are automatically voidable
new - not automatically avoidable if:
- they are fair to the company in price and dealing OR
- facts are disclosed to the board and and disinterested directors or shareholders vote to authorize it
What was the holding and reasoning from Valeant Pharmaceuticals International v. Jerney?
Can it be sanitized by disinterested approval? No because the whole board was interested. No disinterested stock holder ratificatio was available, so it shifts to the entire fairness standard, with the burned on the defendants to show fairness
Per Valeneant case how do you show entire fairness?
Substantive fairness is demonstrated by showing both fairprice and fair dealing
Do Directors owe fidicuart duties to the corp and shareholders?
Yes
When are conflict of interest transaction not voidable?
When they are ENTIERLY FAIR (fair price, fair dealing) to the corporation, OR when they are disclosed, and disinterested directors or shareholders vote to approve