Directors + Officers: Fiduciary Duties, Liability + Indemnification Flashcards
Directors’ Fiduciary Duties - Standard
- director must discharge her duties in good faith and with the reasonable belief that her actions are in the best interest of the corporation (duty of loyalty)
- director must also use the care that a person in like position would reasonably believe appropriate under the circumstances (duty of care)
Fiduciary Duties - Standard - Exam Tip
- every time you see a director arguably in breach of either the duty of care or the duty of loyalty, state the entire standard
Duty of Care - Burden of Proof
- person challenging the directors’ action on the basis of a breach of the duty of care has the burden of proving that the statutory standard was not met
Nonfeasance
- director basically does nothing (“lazy director”)
- b/c a person in like position would do some work, the fact that director did NO work means they breached the duty of care
-> BUT director liable for this breach only if it causes a loss to the corporation (often hard to prove causation) - one of two duty of care scenarios likely to come up on exam
-> make sure to check for loss too!!
Misfeasance
- occurs when the board makes a decision that hurts the business
- causation IS clear here
- BUT director is NOT liable if the director meets the business judgment rule
Business Judgment Rule
Presumption that a director’s decision may not be challenged if the director:
i) acted in good faith
ii) with the care that a person would exercise in a like position AND
iii) in a manner the director reasonably believed to be in the best interest of the corporation
Business Judgment Rule - Significance
- court will not second-guess a business decision if it was made in good faith, was informed, and had a rational basis
- directors who meet the standard won’t be liable for corporate decisions that in hindsight turn out to be poor or erroneous
Director Decisions - Reports + Other Info
Directors are entitled to rely on info, opinions, reports, or statements (including financial statements) if prepared or presented by:
1) corporate officers or employees whom the director reasonably believes to be reliable and competent
2) legal counsel, accountants, or other persons as to matters the director reasonably believes are within such person’s professional competence OR
3) committee of the board of which the director is not a member, if the director reasonably believes the committee merits confidence
Duty of Loyalty Cases - Burden of Proof
- on the DEFENDANT
- cases deal with conflicts of interest
- business judgment rule can never apply when the fiduciary has a conflict of interest
Standards for Upholding Conflicting Interest Transactions
Won’t be enjoined/set aside/give rise to damages b/c of dir interest if:
1) approved by majority (at least 2) of the disinterested directors
-> IMPERATIVE that the director disclosed all material facts to the board or that they were known when the board approved the transaction OR
2) approved by a majority of votes entitled to be cast by disinterested SHs
-> ALSO after disclosure/w/ facts known, + notice of SH meeting must describe the transaction OR
3) Judged by the circumstances at the time the corporation entered into the transaction, it was fair to the corporation
Conflicting Transaction
- aka self-dealing
Any transaction between the corporation and:
1) one of its directors OR
2) that director’s close relative OR
3) another business of the director’s (on the other side)
Standards for Upholding Conflicting Interest Transactions - Concise Statement of Rule
Interested director transactions set aside unless the director shows either:
1) the deal was fair to the corporation when entered OR
2) her interest and the relevant facts were disclosed or known, and the deal was approved by either a) a majority (at least 2) of the disinterested directors OR b) a majority of the disinterested shares
Director’s Presence at Meeting Re Conflicting Interest Transactions
- irrelevant
- doesn’t affect the action if dir was at the meeting where the directors or SHs voted to approve the transaction
Conflicting Interest Transactions - Special Quorum Requirements
- to vote on such transactions, at a directors’ meeting, a quorum is a majority of DISINTERESTED directors
- for SH meeting, quorum consists of majority of votes entitles to be cast, not including shares owned or controlled directly or beneficially by the director w/ the conflicting interest
Conflicting Interest Transactions - Factors to Be Considered in Determining Fairness
- transaction approved by board or SHs may still be set aside if party challenging it can prove it constitutes a waste of corporate assets
- SO even if deal approved, make sure to note on exam that some courts also require a showing of fairness -> look at factors like:
-> adequacy of consideration
-> corporate need to enter into the transaction
-> financial position of the corporation AND
-> available alternatives
