Director's duties & indemnification

Question 1

General

Answer 1

VERY POPULAR CHAPTER ON BAR EXAM

Directors owe two basic duties to the corporation:

1. Duty of Care
2. Duty of Loyalty

Question 2

Duty of Care

Answer 2

Application - duty applies to board decisions in which a director does not have a self-interest or coflict of interest

Note - this is distinguished from ommissions and acts which are situations where the board doesnt do anything versus decisions the board actually makes

Omissions - determed using basic “prudent person standard” - directors have responsibility to act with the care of an ordinarily prudent person in a like position and similar circumstances but if director has special skills, then held to a higher standard

Act - when shareholder is challenging an act of a director, then the reliance and business judgment rule apply

• Reliance Rule - director is entitled to rely on information and reports provided by officers and employees, outside experts such as attorneys or investment bankers, and committes of the board
• Business Judgment Rule - if director actually makes a decision and doesn’t have a personal interest in the decision, courts apply this rule:
• Rebuttable presumption that director reasonably believed his actions were in the best interest of the Corp
• the presumption is rebuttable by clearn a nd convincing evidence and director will be found liable if he
  1) failed to inform himself

failure to inform herself before approving decision

sustained failure by the director to devote attention to an ongoing oversight of the business

director failred to timely investigate a matter of significant concern after being altered in a way that a reasonble director would have responded

2) Self-Interest - director acted disloyally
3) Lack of Good Faith - director did not act in good faith

Exam Tip - courts will rarely find liability if the director fully informed herself; if asked about business judgment rule, then look to how carefully they made decision

Ohio Constituency State - when deciding what is best for corp, must consider employees, suppliers, creditors, customers, state and national economy, community and societal interests, long and short term interests of corp

Question 3

Duty of Loyalty - Self-Dealing Transaction

Answer 3

General Theme - director/board cannot put themselves ahead of the interests of the corporation

Self-Dealing Transaction - corporate transaction where director (or relative of the director) has a financial interst (ex: contract between corp and director)

Rule - interested directed is required to disclosre her interest to the board

No Disclosure - if director fails to disclose interest, then director will be found to have breached her duty unless she can show the transaction was fair to the corp

Safe Harbors - a self interested transaction may be upheld if:

1. it is disclosed and approved by a majority of the boards non-interested directors
2. it is disclosed to and approved by a majority of shareholders without a conflicting interests; or
3. if it is fair and approved by a majority of disinterested directors or shareholders

Defense - not a complete defense, but shifts burden of proof to P

Remedy - rescind or enjoin the transaction or to require the interested director to discorge her excess benefit

Question 4

Duty of Loyalty - Corporate Opportunities Doctrine

Answer 4

General Idea - director does not enter into a transaction with the corp but instead takes a corp oppotunity for herself

Rule - director is expcted to first offer the opportunity to the corp and pursue the oppotunity only if ia disinterested board rejects it

But - if director simply takes the opportunity without presenting it to the corp, the key question is whether it was actually a corp opportunity?

Tests - courts will find corporate opportunity if opportunity relates to the corp’s business and such exists if:

1. Fairness Test - is the trasnaction intrinsically unfair to the corp?
2. Expectancy Test - would the co. expect to take the opportunity?
3. Line of Business Test (OHIO) - is the opportunity in the company’s field? Four Factors
   a. knowledge of the investment or business opportunity was gained by thed riect in his fiduciary capacity
   b. opportunity was within the line of the corporation’s curent business
   c. opprtunity would have been adventageous to the corp
   d. the corp would have been able to accept the opportunity

Question 5

Duty of Loyalty - Competition with the Corp

Answer 5

Director may be fould liable for breaching her duty of loyalty if she engages in a business that competes with the corp

Question 6

Indemnification

Answer 6

General Principle - corporations promise to pay the costs of a director’s defense of a litigation against her

Three Types:

1. Mandatory Indemnification - corp is required to pay costs of defense if the director successfully defends
2. Prohibited Indemnification - corp cannot indemnify against liability for receipt of an improper personal benefit
3. Permissive Indemnification - corp may, but is not required to, indemnify a director for the costs of an unsuccessful suit if the director:
   a. acted in good faith with a reasonable belief her actions were not opposed to the corp and
4. in a criminal case, the drector did not have reasonable cause to believe her conduct was unlawful

Insurance - most corps purchase insurance to indemnify directors

Question 7

Officers

Answer 7

Definition - selected by directors to run the company on a day to day basis

Required Positions - Ohio requires every corp have a president, secretary, and treasurer

Authority - officer’s authority to make decisions is either actual or apparant

1. Actual Authority - implied or expressly stated in the articles, bylaws, or a resolution of the board
2. Apparant Authority - based on the expectation of authority a third person would reasonbly think the officer has

Duties - has same duty of care and lyalty

Indemnification - same as directors