Corporations (Governance - Fiduciary Duties of Directors & Officers)

Question 1

Corporations (Governance - Fiduciary Duties of Directors & Officers)

Business Judgment Rule

Answer 1

A rebuttable presumption that the directors acted:

1. In Good Faith
2. In a manner they reasonably believed to be in the best interests of the corporation,
   AND
3. On an informed basis (appropriate level of care)

Question 2

Corporations (Governance - Fiduciary Duties of Directors & Officers)

Duty of Care

Answer 2

Directors must discharge their duties with the care that a person in a like position would reasonably believe appropriate under similar circumstances.

1. Becoming Informed regarding Decision-Making
2. Devoting Attention to Oversight

Question 3

Corporations (Governance - Fiduciary Duties of Directors & Officers)

Duty of Care:
Breach

Answer 3

Whether a corporate officer or direct has brached their duty of care depends on whether:

1. The decision was made in good faith and
2. The decision-making process was rational

Does not consider the content of the decision

Degrees of wrong extending through stupid to egregious to irrational are not grounds for director liability.

Question 4

Corporations (Governance - Fiduciary Duties of Directors & Officers)

Duty of Care:
Exculpation

Answer 4

Duty of care may be exculpated and/or limited.

Question 5

Corporations (Governance - Fiduciary Duties of Directors & Officers)

Duty of Care:
Red Flags

Answer 5

• Undue haste in decision making
• Lack of board preparation
• Lack of questioning or involvement by the board
• Undue or unwarranted reliance on other officers or experts
• failing to “paper” diligence

Question 6

Corporations (Governance - Fiduciary Duties of Directors & Officers)

Duty of Loyalty

Answer 6

Directors and Officers must put the interests of the corporation before their personal interest and must act in good faith

1. No Usurpation of Corporate Opportunities (Corporate Opportunity Doctrine)
2. No Competing with the Corporation
3. No Interested Director Transactions

Question 7

Corporations (Governance - Fiduciary Duties of Directors & Officers)

Duty of Loyalty:
Exculpation

Answer 7

The duty of loyalty cannot be exculpated

Question 8

Corporations (Governance - Fiduciary Duties of Directors & Officers)

Duty of Loyalty:
Usurpation/Corporate Opportunity Doctrine (Guth Test)

When they can or cannot take a corproate opportunity

Answer 8

This is a factual question to be decided in fairness

A corporate officer or director MAY NOT take a business opportunity for their own if:

1. The corporation is financial able to exploit the opportunity
2. The opportunity is within the corporation’s line of business
3. The corporation has an interest or expectancy in the opportunity, and
4. By taking the opportunity for themself, the corporate fiduciary will be in conflict to their duties to the corporation

A corporate officer or director MAY take a business opportunity for their own if:

1. The opportunity is presented to the director or officer in their individual capacity, not their corporate capacity
2. The opportunity is not essential to the corporation
3. The corporation holds no interest or expectancy in the opportunity, and
4. The director or officer has not wrongfully employed corporate resources in pursuing the opportunity.

NOT: No single factor is dispositive

Question 9

Corporations (Governance - Fiduciary Duties of Directors & Officers)

Duty of Loyalty:
Usurpation
Financial Ability

burden of proof

Answer 9

One the plaintiff makes a prima facie showing of financial ability, the burden shifts to the defendant to establish that the corporation was unable to take advantage of the corporate opportunity.

Question 10

Corporations (Governance - Fiduciary Duties of Directors & Officers)

Duty of Loyalty:
Usurpation
Line of Business Test

Answer 10

An opportunity is within a corporation’s line of business if:

1. It is an activity as to which the corporation has:
   a. Fundamental Knowledge
   b. Practical Experience
   c. An Ability to Pursue
2. Which logically and naturally is adaptable to its business having regard for its financial position, and
3. Is one that is in line with its reasonable needs and aspirations for expansion

Question 11

Corporations (Governance - Fiduciary Duties of Directors & Officers)

Duty of Loyalty:
Usurpation
Interest or Expectancy of the Opportunity

and exceptions

Answer 11

A corporation has an expectant interest in an opportunity when there is a link between the opportunity and the nature of the corporation’s business

Exceptions
1. The corporation is shifting away from its historical line of business
2. The corporation disavows such interest, and
3. The corporation lacks the capacity to capitalize on the interest

Question 12

Corporations (Governance - Fiduciary Duties of Directors & Officers)

Duty of Loyalty:
Usurpation
Individual vs. Corporate Capacity

Answer 12

Whether the fiduciary was approached because of their position with the corporation implicates the opportunity was presented to them in their corporate capacity, not individual.

Question 13

Corporations (Governance - Fiduciary Duties of Directors & Officers)

Duty of Loyalty:
Usurpation
Safe Harbor

Answer 13

A director may usurp a business opportunity only if:

1. They first present the opportunity to the corporation
   OR
2. The corporate charter has limited or eliminated the director’s duty to offer the opportunity to the corporation

This safe harbor is specific and only extends to the specific business opportunity at issue.

Question 14

Corporations (Governance - Fiduciary Duties of Directors & Officers)

Duty of Loyalty:
Conflicting Interest Transactions

and exception

Answer 14

Transactions between a director, their relative, or an entity in which they ahve a material financial interest and the corporation

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Exception
Conflicting transactions may be valid through use of a cleansing device, if it is:
1. Approved by the board
a. By a Majority of Disinterested Directors
b. With Disclosure of the Conflict
AND/OR
2. Entirely Fair

ANALYSIS NOTE: No board approval –> try entire fairness

Question 15

Corporations (Governance - Fiduciary Duties of Directors & Officers)

Duty of Loyalty:
Conflicting Interest Transactions
Cleansing Device

Answer 15

Disclosing the conflicted interest is a cleansing device

Cleansing Device –> Burden shifts to plaintiff to prove waste of corporate assets

No Cleansing Device–> Transaction is voidable at the corporation’s option, unless the involved director proves the transaction was entirely fair

Void vs Voidable –> Voidable = Corporation has option to keep

Question 16

Corporations (Governance - Fiduciary Duties of Directors & Officers)

Duty of Loyalty:
Conflicting Interest Transactions
Cleansing Device: Directoral Interest

Answer 16

A director is interested (or not objective) if they will recieve a personal benefit or face a material detriment that is not shared by all shareholders

Question 17

Corporations (Governance - Fiduciary Duties of Directors & Officers)

Duty of Loyalty:
Conflicting Interest Transactions
Cleansing Device: Directoral Independence

factors to consider

Answer 17

A director is independent if they:
1. Can exercise independent judgment, and
2. Are not unduly influenced by the director at issue
.

A director is generally considered independent if they have:
1. No material relationship with the corporation (outside of their directorship), and
2. No Business, Social, or Family Ties with the company or its directors/senior officers

.
Insufficient Factors when Considered Alone:
1. Personal friendships
2. Professional or colleague relationships

.
Possibly Sufficient Factors when Considered Alone:
1. Financial ties
2. Familial affinity
3. A particularly lose or intimate personal or business affinity
4. Evidence that in the past the relationship caused the director to act non-independently vis a vis an interested director

Question 18

Corporations (Governance - Fiduciary Duties of Directors & Officers)

Duty of Loyalty:
Conflicting Interest Transactions
Cleansing Device: Disclosure

Answer 18

To invoke a cleansing device, the director must make a meaningful disclosure of the conflict, which cannot be incomplete or misleading

Question 19

Corporations (Governance - Fiduciary Duties of Directors & Officers)

Duty of Loyalty:
Conflicting Interest Transactions
Cleansing Device: Entire Fairness

Answer 19

To prove entire fairness, the director must show:
1. Fair Dealing
2. Fair Price

Fair Dealing:
1. What was the timing of the transaction?
2. How was the transaction initiated, structured, negotiated, and disclosed to the directors?
3.How were the approvals obtained?

Fair Price
Relates to the economic and financial considerations of the proposed transaction, including all relevant factors:

1. Assets
2. Market Value
3. Earnings
4. Future Prospects
5. Anything impacting the intrinsic or inherent value of the corporation’s stock

Question 20

Corporations (Governance - Fiduciary Duties of Directors & Officers)

Duty of Loyalty:
Caremark Claims

Answer 20

A violation of directors’ duty of loyalty because of a failure to act in good faith due to:

1. Oversight Failure and
2. Disregarded Fiduciary Duty

Question 21

Corporations (Governance - Fiduciary Duties of Directors & Officers)

Duty of Loyalty:
Caremark Claims
Oversight Failure

Answer 21

To establish a failure of oversight, the plaintiff must prove either:

1. Failure to implement any systems or controls
2. Conscious ignoring of implemented systems or controls

Question 22

Corporations (Governance - Fiduciary Duties of Directors & Officers)

Duty of Loyalty:
Caremark Claims
Disregarded Fiduciary Duty

Answer 22

To establish a Caremark claim, the plaintiff must prove the director knowingly (with scienter) disregarded their fiduciary duties.

Simple gross negligence is insufficient.

Question 23

Corporations (Governance - Fiduciary Duties of Directors & Officers)

Duty of Loyalty:
Caremark Claims
Recent Caremark Issues

Answer 23

Substantial Business Risks –> Business Judgment Rule

Regulatory Compliance –> The more regulated an industry is, the higher the duty of oversight

Cybersecurity –> considered an oversight function