Corporations - Directors: Fiduciary Duties (HEAVILY TESTED) Flashcards
Duty of Care
A director owes the corp a duty of care and a duty of loyalty.
Directors have a duty to manage to the best of their ability. Must act
- in good faith
- with the care that a person in a like position would exercise under similar circumstances.
The directors ONLY owe fiduciary duties to the CORPORATION. This is different than with partnerships.
The burden of proving the statutory standard of duty of care was not met is on the plaintiff/challenger.
Nonfeasance or Misfeasance
Need tort 4 parts: duty, breach, causation, harm.
Nonfeasance = when a director does nothing. Lazy. The director is liable ONLY IF his breach causes a LOSS. Must have causation too.
Misfeasance = when the board makes a decision that hurts the corporation. Causation is clear.
Business Judgment Rule
Directors who meet the standard won’t be liable for corp decisions that in hindsight turn out erroneous.
BJR: A court won’t second-guess a business decision if it
1) was informed
2) was made in good faith
3) was made without conflicts of interest
4) had a rational basis
This is a presumption that when the board took an act, it did its homework.
Director Reliance on Reports or other Info
Directors are entitled to rely on info, reports, statements if prepared or presented by 1) corporate officers or employees; 2) legal counsel, accountants or other persons on matters in their fields; 3) a committee of the board of which the director is not a member.
Duty of Loyalty
Standard: a director owes the corporation a duty of loyalty to act in good faith and with reasonable belief his actions are in the corp’s best interest
The BJR does not apply in duty of loyalty cases. It doesn’t apply when there’s a conflict of interest, and loyalty is about conflicts of interest.
The burden is on the defendant director.
Duty of Loyalty Issues: Self-Dealing Conflicting Interest Transactions
This is when a director sells/buys something from corp.
Interested director transactions will be set aside (or the director will be liable in damages) unless the director shows either:
1) the transaction was fair to the corp when entered into OR
2) the director’s interest and the relevant facts were disclosed or known, and the deal was approved by either 1) a majority of the disinterested directors or 2) a majority of the disinterested shares (not shareholders)
Duty of Loyalty Issues: Competing Ventures
Directors can’t compete with their own corp. Engaging in a directly competing business raises a duty of loyalty problem.
The remedy against a director who goes into a competition with the corp is to give the corp a constructive trust on profits the director makes from the competing venture.
Duty of Loyalty Issues: Corporate Opportunity Doctrine
This is where you’re a fiduciary of the corp and you find out about a business opportunity the corp could take advantage of. That’s a breach of the duty of loyalty.
Requirements:
- the corp must have an interest or expectancy in the thing. Like a contract right is an interest. An expectancy is a tentative claim to something. The closer the opportunity is to the corp’s line of business, the more likely it will be a corporate opportunity.
- lack of financial ability is not a defense. Just because the corp is poor doesn’t mean you can still just steal the corporate opportunity
- board generally decides whether to accept an opportunity or reject
Remedy: if director usurps and still has it, he must sell it to the corp at his cost. if he doesn’t have the thing any more, he has to turn over the profit as a constructive trust
Which directors are liable?
A director is presumed to concur with the board action unless their dissent or absention is in writing. So an oral dissent isn’t good enough. You also can’t dissent if you voted for it.
In writing means 1) in hte minutes 2) delivered in writing to the presiding officer of the meeting; 3) written dissent to the corp immediately after the meeting.
