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
What happens if a conflict of interest transaction is approved by either disinterested directors or shareholders?
thetransaction becomes subject to a duty of care analysis (with thebusiness judgment rule protections)* Note: if it is a majority shareholder’s interest that is being cleansed,the transaction is still subject to the entire fairness review, but burdenof proof shifts from defendant to the plaintiff
What was the holding from Gantler?
irectors are not always required to disclose all information, but oncethey decide to disclose (either voluntarily or because required by law),then there is an obligation to provide accurate, full, fair characterizations.* Plaintiffs have the burden of establishing “a substantial likelihood that thedisclosure of the omitted fact would have been viewed by the reasonableinvestor as having significantly altered the ‘total mix’ of information madeavailable.
If not cleansed by shareholder ratification, it must be entirely fair (i.e., fairdealing and fair price)
What was the holding from Espinoza v. Zuckerberg?
If director interest is cleansed, the transaction becomessubject to a duty of care analysis, which means that means thebusiness judgment rule protects the decision. - The court held that “cleansing” must be accomplished in accordancewith corporate formalities. It cannot be done informally, even if there isone majority shareholder, like Zuckerberg
How does one evaluate conflict of interest transactions?
What is the conflict? (Remember the definition in MBCA 8.61)2. Conflicted actions will be reviewed under the entire fairness standard(burden on defendants to show that the transaction was entirely fair tothe corporation)3. But Conflicted director actions will be reviewed under the businessjudgment rule if:* Approved by informed, disinterested directors (or committee [Note: can evenbe a committee of 1!]), or* Ratified by informed, disinterested stockholders* Includes only “classic” ratification – i.e., when shareholders askedto approve board action that does not legally require shareholderapproval* does not include an informed shareholder vote that was legallyrequired* Vote must meet all the corporate formalities of any other vote
How does one evaluate a duty of loyalty and diversion of corporate opportunities?
- it must be a corporate opportunity
- if it is a corporate opportunity then the director must either - offer the opportunity to the operation, OR disclose the offer to the company and indicate their interest and receive approval from the company
What are the 3 tests to determine if there is a corporate opportunity?
- line of business test - does the company have sufficient experience and ability to pursue the opportunity?
- interest of expectancy - would the opportunity further the established buissness
- fairness test - what is fair under the circumstance
Can companies renounce their interest or expectancy in corporate opportunities?
Yes! IN DELAWARE AND THE MBCA if it is spelled out in the Charter. In the MBCA, the board can agree to waive in advance if it is BEFORE the director engages in the conflict, but that waiver must be approved by a board majority with no less than 2interested directors participating
What was the holding from Dweck v Nasser ?
that Dweck, Taxin, and Fine breached fiduciary dutiesof loyalty to Kids by establishing competing entities, appropriatingcorporate opportunities in the exact business as Kids, and usingcorporate assets for purposes of establishing the competingbusinesses.* Fine further breached his fiduciary duty of loyalty by signing off onDweck’s expense reports of $342,366 where Dweck was beingreimbursed for personal expenses.* Citing Stone v. Ritter, the Chancery Court found that Fine had“consciously disregarded a known duty to act,” facilitating Dweck’sbreach of fiduciary duty. It held him jointly and severally liable withDweck for reimbursement of the $342,366
What is the duty to account?
Deeware principle. Fiduciaries have a duty to account to their beneficiaries for the use of assets they use in a fiduciary capacity - if breached then they are liable for the amounts diverted
