Corporate Fiduciary Duty

Question 1

MBCA and fiduciary duty

Answer 1

Act in good faith in manner reasonably believes to be in best interest of the corporation

Disclose information to other board members material to discharge of decision making or oversight functions

Question 2

What fiduciary duties are owed in Delaware?

Answer 2

Duty of care and duty of loyalty

Question 3

What is the business judgement rule?

Answer 3

An incredibly deferential standard where courts trust the decision of a board so long as its requirements are met

Question 4

True or False: The Business Judgement Rule is not actually a rule

Answer 4

True

Question 5

What are the 4 requirements of the business judgement rule?

Answer 5

1) made a business decision
2) directors were reasonably informed about and carefully deliberated on decision
3) directors were disinterested
4) directors were unbiased and motivated by the welfare of the corporation

Question 6

Under Delaware law, when does a director violate the duty of care?

Answer 6

Gross negligence-an unintelligent or uninformed decision
Intentional or knowing violation of the law

Question 7

True or False: A breach of the duty of care will always result in liability

Answer 7

False. The duty of care can be exculpated in the certificate of incorporation

Question 8

Exculpation

Answer 8

Under Delaware law, the duty of care can be exculpated in the certificate of incorporation

Knowing or intentional violations cannot be exculpated

Question 9

Exculpation vs. Indemnification

Answer 9

Exculpation is immunity for liability. Indemnity is repayment after liability is found

Question 10

True or False: the duty of care is not a distinct duty under Delaware law

Answer 10

True. It is a part of the duty of loyalty

Question 11

How is the duty of good faith breached

Answer 11

A continuous or systemic failure to exercise oversight or to implement measures to keep the board reasonably and timely informed

Question 12

True or False: duty of good faith, the classic Caremark case, is the “most difficult claim for a plaintiff to succeed”

Answer 12

True

Question 13

Despite the unlikelihood of success, why do plaintiffs rely upon the duty of good faith so much?

Answer 13

There is no other option. The duty of care can be exculpated and conflicts cleansed relatively easily, leaving a Caremark claim the sole survivor

Question 14

What did the Blue Bell Ice Cream case had to the duty of good faith?

Answer 14

Oversight must also be exercised over those things fundamental to a business, such as health concerns in a food business

Question 15

True or False: conflict of interest transactions are per se a breach of the duty of loyalty

Answer 15

False. Conflict of interest transactions are permitted underneath both the DGCL and the MBCA

Question 16

What is a conflict of interest transaction?

Answer 16

There is a transaction between a corporation and director(s), the corporation and an entity sharing directors, or a transaction between the corporation and a majority shareholder

Question 17

So, we have a conflict of interest transaction, and we know they are permissible. What do we need for the transaction to be Ok?

Answer 17

The transaction must be “cleansed” in a safe harbor

Question 18

What are the 3 safe harbors under Delaware law?

Answer 18

1) ratified by disinterested directors after full disclosure of material facts
2) ratified by shareholders after full disclosure of material facts
3) entire fairness (substantive fairness as judged by the court)

Question 19

True or False: A conflicted transaction cannot be cleansed by the shareholder vote if such shareholder vote was required for the transaction

Answer 19

True

Question 20

True or False: a majority of directors must be disinterested in order to cleanse the transaction

Answer 20

False. A minority can cleanse, so long as they are disinterested in fact

Question 21

Why would a corporation rely upon entire fairness, up to the whims of the court, when the other procedural safe harbors are easier?

Answer 21

The procedural safe harbors are unavailable. All the directors may be interested and a shareholder vote may be unavailable/impractical

Question 22

What is entire fairness?

Answer 22

A judicial analysis of the substantive fairness of the transaction. It consists of two aspects 1) fair dealing and 2) fair price

Question 23

Fair Dealing

Answer 23

When the transaction was timed, how it was intimated, structured, negotiated, disclosed, and how approved

Question 24

Fair price

Answer 24

Fair considering economic and financial considerations (was the price a fair reflection of the value of the company)

Question 25

True or False: officers do not owe a fiduciary duty

Answer 25

False. Officers owe the same fiduciary duty as directors under Delaware law

Question 26

Broz Test for Corporate opportunity: 4 factors

Answer 26

Officer or director cannot take a business opportunity if 1) corporation is financially able to exploit the opportunity 2) opportunity is within the corp’s line of business 3) corporation has interest or expectation in the opportunity 4) taking the opportunity would place fiduciary in position inimitable to duties to corporation

Question 27

Broz Collary: when a director may take an opportunity

Answer 27

1) presented to fiduciary in individual not corporate capacity 2) opportunity not essential to corp 3) corp holds no interest or expectancy in opportunity 4) director hasn’t used resources of company in pursuing or exploiting opportunity

Question 28

Corporate Opportunity Safe Harbors

Answer 28

1) fiduciary first offers opportunity to corp 2) discloses opportunity to corp and requests consent

Question 29

True or False: under the DGCL, a corporation may renounce an interest or expectancy in a opportunity or class of opportunity

Answer 29

True. Can be in certificate of incorporation or by Board action

Question 30

True or False: under the MBCA, a corporation can in its articles of incorporation or bylaws require a director to bring a corporate opportunity to the corporation

Answer 30

False. The articles of incorporation may limit or eliminate the duty of an officer or director to bring an opportunity to the corp