Duty of Care, Exculpation, Indemnification/ Insurance Flashcards
Pins, Inc. is a Delaware corporation that manufactures bowling pins for sale to wholesalers. Chief, the company’s CEO, has an idea for a business he would like to start personally, totally apart from Pins. Pins’ board of directors has decided to grant him permission to proceed with his separate business. For which of the following business ideas is the board’s permission to proceed with the opportunity MOST likely to count as waste under Delaware law?
A. Chief would like to start a retail chain of bowling stores that will sell mostly Pins’ products (which he will buy from Pins at wholesale prices).
B. Chief would like to purchase a license of Pins’ brand name from Pins at a market rate so that he can start a line of sports apparel.
check
C. Chief will rent out Pins factory to hipsters to use for parties. Chief will not pay Pins anything for the right to rent out the factory.
D. Chief would like to buy the land next to Pins’ factory (owned by Pins) for a price a bit below market and use the land to build a factory that will manufacture bowling balls.
C. Chief will rent out Pins factory to hipsters to use for parties. Chief will not pay Pins anything for the right to rent out the factory.
**Waste Standard Test: corporation paid something and got nothing in return.
Here, the corp is esentailly paying a cost to have Chief rent the Pins factory out, and they are not getting anything in return.
Rationality Test: no reasonable person would think this was okay.
Knitpicks, Inc. (“Knitpicks”), a Delaware corporation, provided streaming video services to its large number of monthly subscribers. Amazing, Inc. (“Amazing”), also a Delaware corporation, was a competitor that also engaged in ecommerce, selling a wide variety of goods online. Both companies were publicly traded. Leader, the CEO of Amazing, decided he was tired of competing with Knitpicks for licensing rights to the hottest movies and television, so he approached Head, the CEO of Knitpicks, and proposed that Amazing buy Knitpicks. After several months of negotiations, Head and the Knitpicks board agreed to sell the company to Amazing for $5 billion. Leader then brought the deal to Amazing’s board for approval. Leader provided a stack of materials a week before the meeting, including a detailed memo explaining the terms of the deal prepared by the well-regarded outside law firm representing Amazing on the transaction, as well as a lengthy fairness opinion provided by a major investment bank stating that the price was fair. The board held several lengthy meetings to discuss the transaction before voting to approve it. Six months after the deal closed, Amazing discovered that Knitpicks’ licensing agreements were not transferable. Without these licenses, Knitpicks was essentially worthless. Shareholders of Amazing brought a derivative action against the board of directors alleging breach of the directors’ duty of care. This suit is most likely to:
A. Fail, because the board was not grossly negligent in informing themselves prior to voting on the transaction.
B. Fail, because all business decisions are risky.
C. Succeed, because a reasonable director of a public company would have known that intellectual property licenses are not transferable.
D. Succeed, because a reasonable director would have read the intellectual property licenses before agreeing to the acquisition.
A. Fail, because the board was not grossly negligent in informing themselves prior to voting on the transaction.
The determination of whether a business judgment is an “informed” one turns on whether the directors have informed themselves prior to making a business decision, of all material information reasonably available to them (Smith v. Van Gorkom).
“Informed prong” requires P meet a “gross negligence” standard. If found to be grossly negligent, then go to entire fairness test. If NOT grossly negligent– then informed prong met.
Corporation’s certificate of incorporation contains a provision stating that its directors will not be liable for any breach of fiduciary duty. Shareholders have the BEST chance of succeeding against Corporation’s directors in a suit for:
A. Breach of the duty of care.
B. Breach of the duty of candor.
C. Breach of the duty of loyalty.
D. The certificate provision provides absolute protection for liability stemming from all alleged breaches of fiduciary duty.
C. Breach of the duty of loyalty.
When a corporation has an exculpatory provision in its articles of incorporation, a complaint alleging breach of fiduciary duty by directors will be dismissed if the complaint does not adequately allege breach of the duties of Good Faith or Loyalty. (Malpiede v. Townson )
Yummy Pies, Inc., a Delaware corporation that is privately held but has no majority shareholder, owns and operates a chain of bakeries that specialize in pies. Yummy’s board has not adopted any bylaws concerning indemnification.
All of the following protections are available to Yummy’s officers EXCEPT:
A. Indemnification at the board’s discretion so long as the officer acted in good faith.
B. Mandatory indemnification, as long the officer acted in good faith, even if there has been no ruling by the court in the case.
C. Mandatory indemnification, if the officer won the lawsuit because the statute of limitations had run.
D. Insurance coverage, if the board elected to take out insurance coverage for its directors and officers.
B. Mandatory indemnification, as long the officer acted in good faith, even if there has been no ruling by the court in the case.
Mandatory indemnification: Under Del §145(c), corporations must indemnify (compensate) its officers or directors (past/ present) who are “successful on the merits or otherwise in defense of any action, suit, or proceeding” related in any way to their services as an officer or director. Includes procedural defenses and claim dismissed for SOL (statute of limitations), no PJ (personal jrdc) or SMJ (sub matter jrdx) and nuisance value settlements.
Need settlement, even nominal amount can qualify
Entrepreneur would like to start a new electronics store. She has an investor who does not want to control the business but insists on as much liability protection for himself as possible. Entrepreneur would like a great deal of flexibility in how she governs the business. Entrepreneur wants control for herself and does not mind taking on some personal liability. Which from the following choices would be the best legal form for the business to take?
A. General Partnership.
B. Limited Partnership.
C. Limited Liability Partnership.
D. Joint Venture.
B. Limited Partnership.
Limited Partnerships: one or more General partners who exercise control and bear personal liability for the limited partnership’s obligations AND one or more Limited partners who don’t exercise control and do not bear the personal liability for the limited partnership’s obligations.
