Duty of Loyalty and duty of care

Question 1

Duty of care requirement.

Answer 1

There is a 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.

Question 2

What can the director rely on in making his business decision.

Answer 2

Directors must be informed to an extent that they reasonably believe is appropriate. They are entitled to rely upon information to an extent that they reasonably believe is appropriate.

They are entitled to rely upon information, opinion, reports, or statements of corporate officers, legal counsel m public accountants etc in making a decision.

A party claiming that the director breached their duty of care has the burden of proof.

Question 3

Duty of Loyalty Attach Images

Answer 3

A director must act in good faith and with reasonable belief that what he does is in the corporations best interest. The business-judgment rule of presumption does not apply if there is a duty of loyalty issue.

Question 4

How does a duty of care arise

Answer 4

In three ways BCC

1. Director is on _b_oth sides of the transaction; a director has a material financial interest in a contract, as well as knowledge of that interest, yet still votes to approve the contract.
2. _C_ompetes with corporation : a director may not compete with his corporation.

3. **C**orporate opportunity. a corporate officer may not usurp a corporate opportunity.

Question 5

Defences to liability for breach of the duty of loyalty

Answer 5

MBCA includes three safe harbours that may protect a director who breached his duty of loyalty

1. Approval by disinterested directors

2. Approval by disinterested shareholders or

3. if the transaction is judged to be fair at the time it was entered into

Question 6

Waiver of a duty in an LLC

Answer 6

An LLC operating agreement may waive the duty of loyalty so long as it is not “ manifestly unreasonable”.