Directors and Officers--Liability and Indemnification Flashcards
What is the business judgment rule?
A presumption that the directors manage the corporation in good faith and in the best interests of the corporation and its shareholders (directors have duty to manage and BJR protects)
* As such, directors not liable for innocent mistakes of business judgment
* However, owe fiduciary duties of care and loyalty
What is the duty of care?
The director must act with the care that a prudent person would use in regard to their own business unless the articles have limited this duty
* Look for director blowing off board duties and compare with the director who is vigilant (who will be protected by BJR for mistakes)
What is the duty of loyalty?
Directors may not receive an unfair benefit unless there’s been disclosure of the material facts and some form of independent ratification
* The other parties are presumably independent (watch for facts that rebut this presumption such as interested in same transaction or family members)
What is an unfair benefit in terms of the duty of loyalty?
(1) Self-Dealing
* When a director receives an unfair benefit to themselves (or a relative, family member, or their business) in a transaction with the corporation
(2) Usurping
* Director receives unfair benefit by taking away some opportunity that could be pursued by C itself
How may violations of the duty of loyalty be independently ratified?
- Majority vote of independent directors approvate behavior OR
- Majority vote of shares held by independent stockholders
What sort of indemnification is prohibited?
A corporation may never indemnify a director who’s held liable to their own corporation
* Derivative action or, if in connection with any other proceeding, adjudged liable for receiving an improper personal benefit
* NOT settling
What sort of indemnification is mandatory?
Must always indemnify directors and officers if they win a lawsuit unless articles provide otherwise
What sort of indemnification is permissive?
(1) D/O has been held liable to a third party . . . OR
(2) D/O settles with C . . .
. . . if the D/O can show they acted in good faith and believed that their conduct was in the corporation’s best interest and have had no reason to believe conduct was criminal
* This includes a D/O who settles with her OWN C
How can C determine whether to grant permissive indemnification?
(1) Majority vote of quorum of disinterested/independent directors
(2) Majority vote of committee of at least 2 disinterested directors
(3) Majority vote of shares held by disinterested shareholders OR
(4) Special legal counsel’s opinion
