Duties of Directors, Officers, and Shareholders

Question 1

The business judgment rule is

Answer 1

• The essence of business is risk
• a rebuttable presumption that directors and officers who act in good faith, have acted in a non-negligent way, as long as they were adequately informed.

Question 2

Directors and officers must discharge their duties:

Answer 2

1. In good faith;
2. With care that an ordinarily prudent person in a like position would employ; and,
3. In a manner they reasonably believe to be in the best interest of the corporation

Question 3

Duties of Directors and Officers

Answer 3

1. Duty of Care

2. Duty of Loyalty

Question 4

Suppose a party is identified as belonging to more than one of the three main groups (directors, officers, and shareholders) that structurally comprise a particular corporation. In this situation, an analysis of this party’s duties and exposure to liability should

Answer 4

separately consider this party’s duties and liabilities in each of his or her corporate capacities (as director, officer, or shareholder).

Question 5

Who bears the burden of proving the duty of care?

Answer 5

There is a presumption that an officer/director acts in good faith. Initial burden is on plaintiff to show:

1. They did not act in good faith; or,
2. On an informed basis

Question 6

Business judgment rule protects

Answer 6

directors from liability when the corporation suffers as a result of their good faith, informed errors in business judgment.

Question 7

What does the business judgment rule not apply to

Answer 7

conflict of interest transactions

Question 8

Duty of Loyalty

Answer 8

Must be loyal to the corporation and not promote their own interests in a manner that is injurious to it.

Question 9

Conflicts of interest typically arise in three situations, when directors or officers:

Answer 9

1. Self-dealing (transact business with corp –> both sides of the transaction)
2. Usurp a corporate opportunity; or,
3. Directly compete with a corporation.

Question 10

When a director or officer is involved in a “conflict of interest transaction,” the duty of loyalty requires the director or officer to:

Answer 10

Notify the other directors/officers/shareholders of all material facts regarding the conflict

Question 11

A “conflict of interest transaction” may violate the duty of loyalty, and be voidable, unless:

Answer 11

Upon full disclosure, non-interested directors or shareholders vote to authorize or approve the transaction.

Question 12

A conflict of interest transaction may be

Answer 12

voided

Question 13

An “opportunity” belongs to the corporation if, given the circumstances, fairness dictates that:

Answer 13

the interest of the corporation be protected from the self interested conduct of the officer/director

Question 14

A determination of whether the opportunity properly belongs to the corporation, should consider

Answer 14

(1) whether the individual became aware of the opportunity while acting in his capacity as a director or officer;
(2) whether the business constituting the opportunity is closely related to that of the corporation;
(3) whether the board had expressed an interest in, or expectancy of, acquiring that type of business; and
(4) whether corporate funds or facilities were used in discovering, developing, or acquiring the opportunity.

Question 15

if an “opportunity” is deemed to belong to the corporation, no usurpation will be found if the corporation

Answer 15

after full disclosure, rejected the opportunity or was otherwise unable to take advantage of the opportunity.

Question 16

Controlling shareholders have a duty of good faith whereby they must:

Answer 16

Refrain for transacting the business as a proxy for self dealing

Question 17

Three characteristics of a closed corporation

Answer 17

(1) a small number of shareholders,
(2) no ready market for its shares, and
(3) substantial involvement by shareholders in management.

Question 18

When do shareholders have a fiduciary duty?

Answer 18

When they are in a closed corporation