Duty of Care and Duty of Loyalty

Question 1

Duty of care - Business Judgment Rule

Answer 1

• Rebuttable presumption that in making a business decision, the directors acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company.
• must be informed to an extent that they reasonably believe is appropriate
• can rely on information, opinions, reports, statement of corporate officers, legal counsel, public accountants, etc.
• Party claining that the directors breached their duty of care has the burden of proof

Question 2

Duty of Loyalty

Answer 2

• Director is on both sides of a transaction: has a material financial interrest in a contract, as well as knowledge of that interest,yet still votes to approves the contract
• Competes with corporation: a director may not compete with his corporation
• Corporate opportunity: a corporate officer may not usurp a corporate opportunity

Question 3

Revised Model Business Corporation Act

Defenses to Duty of Loyalty

Answer 3

May enjoy three safe harbors protections:
* majority approval by disinteresed directors: if all relavant information is disclosed
* majority approval by disinterested shareholders
* transaction is judge to be fair at the time it was entered into

Question 4

Duty of Care

Answer 4

With respect to the duty of care, directors have a duty to act with the care that a person in a like position would reasonably believe appropriate under similar circumstances.