duty of loyalty

Question 1

Duty of loyalty general rule

Answer 1

May not receive unfair benefit to detriment of corporation without EFFECTIVE DISCLOSURE and RATIFICATION

Question 2

What type of transactions violate duty of loyalty?

Answer 2

Self-dealing transactions

Question 3

Defining self-dealing transactions

Answer 3

Transaction where director, officer, or their relative receives substantial benefit directly from corporation

Question 4

Are all self-dealing transactions prohibited?

Answer 4

NO, salaries of employees are self-dealing

Question 5

Corporate Opportunity Doctrine

Answer 5

May violate duty of loyalty if officer usurps or steals corporate opportunity

(stepping into business of what company usually does)

Question 5

When may self-interested transaction be upheld?

Answer 5

If DISCLOSED and RATIFIED by
1) majority of disinterested directors OR
2) majority of disinterested shareholders

Question 6

Does ratification win case?

Answer 6

Not always, but can shift burden to plaintiffs

Question 7

Fairness defense to self-interested transaction

Answer 7

If director or officer can demonstrate that transaction was FAIR, they will win

Question 8

Is 1) disclosure/ratification or 2) fairness stronger defense to self-dealing?

Answer 8

FAIRNESS – if officer can show fairness, he always wins

Disclosure/ratification only shifts burden and doesn’t guarantee win