Chapter 8 Partial

Question 1

Substantive fairness

Answer 1

Both fair price and fair dealing

Question 2

Fair Dealing

Answer 2

timing, initation, structuring, negotiation, disclosure, approvals

Question 3

Fair Price

Answer 3

economic and financial considerations

Question 4

Fair Examples of Fair Dealing

Answer 4

Met five times to discuss the bonuses

or

The compensation consultant’s report concluded that the value of the options was a reasonable estimate.

Question 5

Unfair examples of fair dealing

Answer 5

All three members were slated to receive the approved bonuses

two of the three members were close personal friends with the company for decades and were negotiating lucrative consulting deals to follow the completion of their board service

compensation consultant was chosen at the direction of the board

ICN’s outside counsel played little role in the compensation committee’s work.

Question 6

Fair Price

Fair Arguments

Unfair arguments

Answer 6

Bonus amount

Fair Arguments = Bonus was based on the total value of Ribapharm

Unfair arugments =

• The bonus was based on the total value of Ribapharm (not the value added by the IPO and spin-off_
• The bonus was based on the erroneuos assumption of 3B$ valuation of the company
• Panic ignored outside counsel’s advice to revisit the bonus scheme when IPO was repriced by UBS
• The compensation consultant’s report found no comparable transactions.

Question 7

Majority shareholders other than directors and officers owe fiduciary duties to the corporation and to other shareholders

Answer 7

True

Question 8

Entire Fairness applies to majority shareholders

Answer 8

A majority or controlling shareholder standing on both sides of a transaction bears the burden of proving the entire fairness of its actions, that is, the fairness of the procedure developed to approve a transaction and the fairness of the price of the transaction.

These happen a lot in parent-subsidiary situations - such as a parent corporation and its controlled subsidiary signing a contract with each other.

Question 9

A conflicted transaction that has not been properly cleansed is subject to entire fairness review (burden on defendant to show transactions were entirely fair to the company and its shareholders)

Answer 9

True

Question 10

Conflict of Interest Transactions are subject to what test

Answer 10

Substantive fairness test:

Fair dealing + Fair price

Question 10

Conflict of interest transactions are not void or voidable if

Answer 10

1. They are entirely fair to the corporation - fair price and fair dealing; or
2. 1) material facts are disclosed to the board of directors or shareholders and 2) either the disinterested directors or the disinterested shareholders authorize, approve or ratify the transaction.

Question 11

Director interest is cleansed means

Answer 11

It satisfy the second prong - 1) materail facts are disclosed to the board of directors or shareholders and 2) either the disinterested directors or the dis interested shareholders authorize, approve, or ratify.

Question 11

Duty of Disclose in regarding to ratification of conflicts

Answer 11

Directors are not always required to disclose all information, but once they decide to disclose, then there is an obligation to provide accurate, full, fair characterizations.

Plaintiffs have the burden of establishing “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.

Question 12

Do corporate officers have the same fiduciary duties as corporate directors?

Answer 12

Yes, same as directors.

Question 13

The court held that the shareholder ratification of the decision to privatize could not, as a matter of law, absolve the board of its conflict of interest

Answer 13

Yes.

Question 14

Both ratification and reclassification could not become legally effective without a statutorily mandated shareholder vote approving the amendment to company’s certificate of incorporation, so since it wasn’t legally effective, it doesn’t absolve the conflict of interest.

Answer 14

True.

Question 15

Can a disinterested controlling shareholder ratify a transaction approved by an interested board of directors by expressing informal assent to the transaction?

Answer 15

No, in Espinoza v Zuckerberg - the court held that cleansing must be accomplished in accordance with corporate formalities. It cannot be done informally, even if there is one majority shareholder, like Zuckerberg.

Deviation from the corporate formalities of the DGCL could lead to 1) imprecision concerning what action has been ratified and whether the requisite level of approval has been obtained and 2) a lack of transparency to non-assenting stockholders.

Question 16

Conflicted director actions will be reviewed under the business judgement rule if:

Answer 16

1. Approved by informed, disinterested directors (or committee) - cleansed.
2. Ratified by informed, disinterested stockholders - ratification formally.
   Ratification includes only “classic” ratification - ie. when shareholders asked to approve board action that does not legally require shareholder approval. It does not include an informed shareholder vote that was legally required and vote must meet all the corporate formalities of an other vote.

Question 17

What is an disinterested stockholder?

Answer 17

In the context of business organizations, particularly in corporate governance, a “disinterested stockholder” refers to a shareholder who does not have a personal interest in the outcome of a particular transaction or decision that differs from the interest of shareholders at large.

Being “disinterested” typically means that the stockholder:

Does Not Have a Conflict of Interest: They are not part of, and do not stand to gain or lose from, the transaction in any way that is not shared by the majority of other shareholders.
Is Not an Insider: They are not a member of the company’s management, board of directors, or a related party (like a family member of an insider) who might have a vested interest in the transaction.
Is Not a Beneficiary: They do not have a personal financial interest in the transaction that is separate from their interest as a shareholder. For example, they are not receiving personal benefits as a result of the transaction that are not being offered to all shareholders.

Question 18

In a litigation of duty of loyalty. who would have the burden of proof in the litigation and what needs to be proved?

Answer 18

SInce this is a conflict-of-interest transaction, the defendants would have the burden of proof to show either an appropriate cleansing of the transaction or the entire fairness of the transaction.

Since the transaction was not voted for by a majority of the disinterested shareholders, there is no burden shifting, and entire fairness remains the standard of proof for the defendants to prove.

Question 19

Tests to determine if something qualifies as a corporate opportunity:

Answer 19

The “line of business” test asks whether the company has sufficient experience and ability in the particular field to exploit the opportunity. (Note: We learned the first two in partnerships)
The “interest or expectancy” test asks whether the opportunity would further the established business.
The “fairness” test, which determines the existence of a corporate opportunity by applying ethical standards of what is fair and equitable under the circumstances.
These ethical standards depend on the line of business the company.

Question 20

MBCA 2.02(b)(6): allows the articles of incorporation to eliminate or limit the duty of a director or any other person to offer business opportunities to the corporation.

Answer 20

True

The MBCA also allows the board to agree in advance to waive any conflict BEFORE the interested director enters into the conflict, BUT
that advance waiver must be approved by a majority of the Board, with no fewer than two, non-conflicted directors approving of it.

Question 21

Does establishing competing entities constitute a breach in duty of loyalty?

Answer 21

Yes, as per Dweck v Nasser.

appropriating corporate opportunities in the exact business as Kids, and using corporate assets for purposes of establishing the competing businesses. = breach of duty of loyalty

Question 22

Duty to account

Answer 22

a duty to account to their beneficiaries for their disposition of all assets that they manage in a fiduciary capacity. That duty carries with it the burden fo proving the the disposition was proper. Included with the duty to account is a duty to maintain records that will discharge the fiduciaries’ burden and if that duty is not observed, every presumption will be made against the fiduciaries.

If coroprate fiduciaries divert corporate assets to themselves for non-corporate purposes, they are liable for the amounts wrongfully diverted.