Corporations: Internal Governance Flashcards
Roles and Duties with Respect to Creditor
Creditors: provide money to the firm through loans.
Bottom line: roles and duties owed to creditors is governed by contract law; legal analysis turns on:
○ Interpretation of express terms
○ Implied duty of good faith and fair dealing
○ No fiduciary duties to debtholders
Roles and Duties with Respect to Board of Directors
Board of Directors: must act with duty of loyalty and duty of care; they owe fiduciary duties and are bound by such
To whom are these duties owed? 2 Theories:
(1) Stakeholders: these duties are owed to the people who make the existence of the corporation possible
■ Stakeholders include the community, shareholders, employees, and clients/customers
(2) Shareholder Primacy: duties owed to the shareholders – those that invest capital are the owners and should get to decide what to do with it
Holdings Related to Corporate Purpose
(1) Ebay Domestic Holdings, Inc v. Newmark
● Holding: “Having chosen a for-profit corporate firm, the Craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders.”
(2) In re Trados
● Directors of a Delaware corporation owe fiduciary duties to the corporation and its stockholders which require that they strive prudently and in good faith to maximize the value of the corporation for the benefit of its residual claimants..”
(3) Constituency Statutes
● A majority of states have “constituency” statutes that expressly allow (but do not require) a corporation to consider stakeholders’ and other constituencies’ interests alongside shareholders’ interests
(4) Corporate Charitable Giving
● All 50 states have statutes providing for corporate authority to make charitable contributions
● Theodora Holding Corp. v. Henderson
FACTS: Henderson was controlling shareholder and director of a corp, and his ex-wife and daughter owned some stock in the corp. Corp wanted to make a donation to a Boys Camp, and the Court used reasonableness standard to assess the charitable contribution.
HOLDING: The amount was reasonable and that the relatively small loss of income = outweighed by the benefits of the gift
(5) Political Spending
● Citizens United v. FEC
(1) government may not, under the 1st Amendment, suppress political speech on the basis of the speaker’s corporate identity
(2) disclaimer and disclosure provisions of Bipartisan Campaign Reform Act of 2002 didn’t violate the 1st Amendment
● Absent a conflict of interest, illegality, or fraud, a decision to spend corporation money for an independent political expenditure is treated as an ordinary business decision
(6) Current Trends re Corporate Purpose
● CSR & ESG: both involve social / environmental concerns
○ Law is uncertain in this area b/c law still upholds shareholder primacy
(7) Benefit Corporations & B Corps
● Benefit Corps
Entirely separate entity from a traditional corporation that enables pursuit of dual mission of profits and a public benefit
○ Requires specified public benefit in the charter
○ Mandates board to consider the impact on non-shareholder interests (e.g., the environment, society, stakeholders)
○ Most statutes require a benefit report (disclosure) and provide for a “benefit environment proceeding” mechanism that may be brought
● B-Corps
○ 3rd party certification by B lab for meeting standards vs benefit corporate organizational form
Delaware’s Duty of Care Standard
● Regulates diligence in performing tasks
● Limited by the Business Judgment Rule (BJR)
Duty of Care Under MBCA § 8.31
Director may be found liable if:
(a)(1): corporate indemnification or cleansing does not preclude liability; and
(a)(2)
(i): director did not act in good faith, or
(ii) director did not believe she was acting in the best interest of the corporation/ was not informed, or
(iii): a lack of objectivity due to director’s lack of independence, or
(iv): director failed to devote ongoing attention to oversight or devote timely attention when particular facts arise.
Business Judgement Rule
Protects Directors from Liability
A court will defer to the Board of Director’s business judgment unless their actions:
(1) are not in the honest belief that action is in the best interests of the corporation…or
(2) are not based on an informed investigation, or
(3) involve a conflict of interest
Leveraged Buy Outs (LBOs)
Definition:
- An acquisition of all of the firm’s outstanding shares
- Using borrowed funds
- Secured by the assets of the company to be acquired
Why execute an LBO?
- Help to finance purchase
- More risk = more return = more discipline
Indemnification (Delaware § 145)
(a) A corporation can indemnify a person who is or was a director against expenses (including attorney’s fees), judgments, fines and amounts paid in settlement if the person acted in good faith and no reasonable cause to believe conduct was unlawful. Termination by settlement does not create a presumption not in good faith or conduct was unlawful.
(b) No indemnification if person shall have been adjudge liable to the corporation unless Court of Chancery permits.
(c) If successful on the merits such person shall be indemnified.
Directors and Officers Insurance
DGCL § 145(g) A corporation shall have power to purchase and maintain insurance on behalf of a director for any liability, whether or not the corporation would have the power to indemnify against such liability
Reaction to Smith v. Van Gorkem
DGCL § 102(b)(7)
May include in COI a provision eliminating or limiting the personal liability of a director…for monetary damages for breach of fiduciary duty…provided such provision shall not eliminate or limit liability of a director:
○ (i) for breach of director’s duty of loyalty…;
○ (ii) for acts of omissions not in good faith or which involve intentional misconduct;…
Duty of Loyalty and BJR
No BJR Shield
Duty of Loyalty Analysis
STEP ONE: Does the transaction involve a conflict of interest? Need all 3 to be true:
(1) Is a director or shareholder on one side of the transaction? Conflicting interests if:
○ (i) Director is a party to the transaction;
○ (ii) Director had knowledge and a material financial interest in the transaction; or
○ (iii) A transaction which the Director knew a related party had an interest in (spouse, child, grandparent, sibling, aunt, uncle (anyone greater than a cousin))
(2) Is the firm on one side of the transaction (corporate opportunity doctrine)?
(3) Is the transaction providing a benefit from the firm not received by all?
STEP TWO: Has the transaction been properly cleansed?
MBCA:
(i) Qualified Director’s cleanse (§ 8.62);
(ii) Independent shareholders ratify (§ 8.63);
(iii) Transaction is judged fair (§ 8.61(b)(3)
Delaware:
No contract or transaction between a corporation and 1 or more of its directors or officers … shall be void or voidable, if:
1) Informed, disinterested directors approve; or
2) Informed shareholders ratify; or
3) Transaction is substantively fair to corporation
Corporate Opportunity Doctrine
Delaware (Guth Test)
(1) Corporation is financially able to take the opportunity (not dispositive – lessens defendant’s burden)
(2) Opportunity is in the corporation’s line of business
■ In line with reasonable needs and aspirations for expansion?
■ Does the corporation have fundamental knowledge about the activity and desire to pursue?
(3) Corporation has an interest or expectancy in the opportunity
■ Interest/Expectancy Test (Interest: legal right to, Expectancy: something which, in the ordinary course of things, would come to the corporation)
■ Line of Business test: broader scope of rights in comparison to interest/expectancy
(4) Embracing the opportunity would create a conflict between director’s self interest and that of the corporation.
Duty to Act in Good Faith
(1) Corporation can Indemnify Directors
○ DGCL: If a current of former director acted in good faith, and no reasonable cause to believe conduct was unlawful, a corporation can indemnify them against expenses (including attorney’s fees), judgments, fines, and amounts paid in settlement.
■ Termination by settlement does not create a presumption not in good faith or conduct was unlawful
(2) A director shall be fully protected in relying in good faith upon specified documents and persons [advisors]
(3) DGCL: Certificate of Incorporation may include a provision eliminating personal liability of a director for monetary damages for breach of fiduciary duty SO LONG AS that provision does not eliminate the director’s liability for:
■ (i) for breach of director’s duty of loyalty..;
■ (ii) for acts or omissions not in good faith or which involve intentional misconduct
(4) Business Judgement Rule: Director may be found liable if they did not act in good faith
Examples of Breaching the Duty of Good Faith
(1) Intentional dereliction of duty (Disney)
(2) Failure to provide adequate oversight (Frances v. United Jersey Bank)
(3) Failure to gather information and comply with law (Caremark)
