Corporations 5 Flashcards
Duty of Loyalty: Executive Compensation
Circular problem
Who sets officer compensation?
Who is on the board?
Treat Executive Compensation Decisions as Conflict of Interest Transactions
- If we don’t have disinterested and informed approval
of the directors/shareholders, we need
fairness which is specifically the compensation is reasonable and not excessive.
* If we do have disinterested approval, the business
judgment rule kicks back in
Beholden directors aren’t disinterested
Treat Executive Compensation Decisions as
Conflict of Interest Transactions
- Tax Implications
- Reasonable compensation for employees is a deductible expense for the corporation.
- Dividends have a dividend tax.
Wilderman v. Wilderman
7 factors of reasonable compensation
- (1) what other executives receive who are similarly situated;
- (2) the ability of the executive;
- (3) whether or not the Internal Revenue Service has allowed the corporation to
deduct the amount of salary alleged to be unreasonable; - (4) whether the salary bears a reasonable relation to the success of the corporation;
- (5) the amount previously received as salary;
- (6) whether increases in salary are geared to increases in the value of services rendered; and
- (7) the amount of the challenged salary compared to other salaries paid by the
employer
What about Director Compensation?
- Unless the charter or bylaws provide otherwise, the board may set director compensation. (DGCL §141(h); MBCA §8.11)
- Setting an unreasonable compensation will breach the directors’ fiduciary duties.
Duty of Loyalty: Corporate Opportunity
general rule
The directors’/officers’
fiduciary duties prohibit them
from diverting or usurping a
business opportunity from
their corporation to
themselves without first
giving their corporation an
opportunity to act.
Duty of Loyalty: Corporate Opportunity
Tests for Corporate Opportunity
- Interest or expectancy (dibs)
- Line of business (not dibs)
- Becomes aware in the course of their work for the corporation, because of their position pr otherwise uses the corporation’s resources (how heard of opp)
- Fairness
- 2 step
Duty of Loyalty: Corporate Opportunity
Tests for Corporate Opportunity
1. Interest or expectancy
- Interest already existing
- Expectancy shown by an affirmative action to demonstrate a desire to pursue the opportunity; or
1. formal board action isnt neccessary - Corporation has a substantial need for oppertunity
Duty of Loyalty: Corporate Opportunity
Tests for Corporate Opportunity
2. Line of business
Avowed business purpose
Duty of Loyalty: Corporate Opportunity
Tests for Corporate Opportunity
Director/Officer Defenses
- Offer it to the corporation first and have it
disclaimed (ALI §5.05); MBCA § 8.70)) - Timely and adequate disclosure of opportunity alone (Broz vs. Cellular Information Systems, Inc. and Ostrowski vs. Avery)
- Fairness
- The requirement to clear a Corporate Opportunity has been limited or eliminated in the charter (DGCL § 122(17); MBCA § 2.02(b)(6)
NOT lack of $ ( a defense that is no longer a defense on its own)
Duty of Loyalty: Corporate Opportunity
Tests for Corporate Opportunity
Director/Officer Defenses
1. Offer it to the corporation first and have it disclaimed (ALI §5.05); MBCA § 8.70))
- Disinterested directors or shareholders disclaim the corporate opportunity after disclosure or knowledge
- Disinterested superior officer approves (ALI §5.05
Duty of Loyalty: Corporate Opportunity
Tests for Corporate Opportunity
Director/Officer Defenses
3. Fairness
Courts are split if this can only be a defense after disclosure (who adopted ALI) or if it is a defense itself (DE and CT)
Relationship between Remedies and Burden
of Proof
- Duty of care and loyalty
- Duty of Care – about damages
(Show causation) - Duty of Loyalty – about getting a deal rescinded/a fair price or getting the opportunity
(Show a breach that wasn’t cleansed)
Duty of Loyalty Generally
Directors and officers must put the
corporation’s interest ahead of their personal
interests
Duty of loyalty circumstances
- Conflict of Interest
- Executive Compensation
- Corporate Opportunity
Upholding a Conflict-of-Interest Transaction (safe
harbors)
- (1) Disinterested/informed director authorization
- (2) Disinterested/informed shareholder authorization
- (3) Fair when approved
- need them to know about material facts
- was it a good deal, was it good for the corp?
Duty of Loyalty: Executive Compensation
- 4 points
- circular problem
- conflict of interest
- director compensation
Corporate oppertunity
Director defenses (4)
- (1) Offer it to the corporation first (ALI §5.05); MBCA § 8.70))
- Disinterested directors or shareholders disclaim the corporate opportunity after disclosure or knowledge
- Disinterested superior officer approves (ALI §5.05)
- (2) Timely and adequate disclosure of opportunity alone (Broz vs. Cellular Information Systems, Inc. and Ostrowski vs. Avery)
- (3) Fairness
- (4) The requirement to clear a Corporate Opportunity has been limited or eliminated in the charter (DGCL § 122(17); MBCA § 2.02(b)(6))
3 questions for corporate oppertunity analysis
- Does the state allow
the charter to
renounce corporate
opportunities and has
the charter done so? - Is there a corporate
opportunity under
one of the test? - Is there a defense?
General Rules about Duties of Shareholders
Generally,
unless a shareholder has contractually agreed to it, a
shareholder has no duty to the corporation or the other shareholders.
General Rules about Duties of Shareholders
- exceptions for
- Some courts have made exceptions to the general rule for:
- Controlling shareholders, particularly in closely held corporations
- In very closely held corporations in some cases
Controlling shareholder duties arise:
Conflict of interest
* Sales of the controlling interest
A controlling shareholder (or
controlling group) is
an investor (or group of investors) with the power to direct corporate affairs.
Controlling Shareholder
How do they direct corporate
affairs?
- Ability to elect (and remove) a
majority of the board of directors - Not always just who controls
the majority of shares
