Duty of Loyalty & Derivative Litigation Flashcards
Hats, Inc. (“Hats”) is a Delaware corporation in the clothing business with fifty shareholders, each of whom owns 2% of the company’s outstanding stock. Director, one of Hats’ seven directors (but not a Hats shareholder), belonged to a tennis club that matched members of similar ability to play against one another. Hats paid the club’s fees for Director to give Director a place to meet with business contacts. Director was once matched against Inventor. After the match, the two chatted and Inventor told Director he had recently invented a new type of mousetrap that was 30% more effective than the traditional model. After many more meetings, the two agreed to go into the mousetrap business together. The new business was hugely successful. When the other Hats directors found out, however, they voted to have Hats sue Director for taking an opportunity that should have belonged to Hats. Director’s strongest argument that he was free to take the mousetrap opportunity for himself was:
A. Director was not a shareholder of Hats.
B. Hats was in the clothing business.
C. Director met Inventor playing tennis.
D. Hats’ resources were not used in the acquisition of the opportunity.
B. Hats was in the clothing business.
- Factors Arguing that Fiduciary May Take Opportunity:
- Opportunity is presented to the fiduciary in his/her individual, not corporate capacity
- Opportunity is not essential to the corporation
- Corporation holds no interest or expectancy in the opportunity
- Fiduciary has not wrongfully employed the resources of the corporation in pursuing or exploiting the opportunity
Here, clothing is clearly not related to mouse traps so the opportunity is not essential to the corporation
Parent, Inc. owns 95% of Subsidiary, Inc. Both are Delaware corporations. Which of the following transactions DOES count as a self-dealing transaction that would be subject to the entire fairness (also known as the “intrinsic fairness”) test?
A. Parent appointed one of its own directors as the CEO of Subsidiary, a position that comes with a substantial salary.
B. Parent caused Subsidiary to pay out a dividend to the owners of its common stock. Subsidiary has only one class of stock, and Parent own 95% of it and so would receive 95% of the dividend payments.
C. Parent sold its entire stake in Subsidiary to another corporation for a substantial profit.
D. Parent purchased Subsidiary’s factory for its own use, paying a price that an outside expert determined was fair.
D. Parent purchased Subsidiary’s factory for its own use, paying a price that an outside expert determined was fair.
Under the Delaware Supreme Court’s opinion in Rales v. Blasband, each of the following is a scenario in which the Aronson test for demand futility is reduced to one prong (whether the directors are disinterested or independent) EXCEPT:
A. Only half of the current directors made the decision being challenged by the derivative suit.
B. The decision being challenged by the derivative suit was made by the board of a different corporation.
C. The action being challenged by the derivative suit was not a decision by the board.
D. All of the directors who made the decision being challenged by the derivative suit have been replaced.
A. Only half of the current directors made the decision being challenged by the derivative suit.
Where at least half the directors serving when the complaint is filed approved the underlying transaction, the full Aronson test applies***
Rales: Aronson is reduced to its first prong that the directors are not independent and/ or disinterested if:
- A majority of the directors who made the decision have been replaced; or
* The derivative suit is based on something other than a business decision of the board; or
* The derivative suit is based on a decision made by the board of another company.
Shareholder, a small shareholder of a Delaware corporation, launched a derivative suit against the corporation’s directors. Shareholder persuaded the court that she had properly alleged demand futility. Six months later, when discovery was well under way, the corporation’s board appointed a special litigation committee to investigate the suit and determine if the suit was in the company’s best interest. The board members on the committee voted unanimously to ask the court to dismiss the suit. The court will consider all of the following in ruling on the committee’s request, EXCEPT:
A. The court will evaluate whether the committee was sufficiently informed.
B. The court will evaluate whether the board appointed committee members who seemed particularly likely to vote to dismiss the suit.
C. The court will exercise its own business judgment to decide if the suit is in the company’s best interest.
D. The court will evaluate whether the committee was independent.
B. The court will evaluate whether the board appointed committee members who seemed particularly likely to vote to dismiss the suit.
In a dismissal of a derivative litigation by Special Litigation Committee, DE courts use the Zapata Two-Step Test:
(1) Board has burden of proving committee’s independence, good faith, and a reasonable investigation
(2) Court then has discretion to use its own business judgment in deciding whether the case should be dismissed.
Corporation (registered in Delaware) has three shares outstanding. Anna owns one, Bethany owns the second, and Courtney owns the third. The shares are all the same class of ordinary common stock and each share carries one vote. The board has six directors who each serve three-year terms, with two directors up for reelection each year. One of these directors, Daniel, attempted to stage a hostile takeover of Corporation but failed. Angry at Daniel's betrayal, all three shareholders voted to fire Daniel from the board at a properly noticed special shareholder meeting. Has Daniel been fired as a director? A. Yes, because the shareholders elect the directors and can fire them at will.
B. Yes, because the shareholders had cause to fire Daniel for trying to stage a hostile takeover.
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C. No, because trying to take over the corporation is a perfectly legitimate activity for a director.
D. No, because Corporation had cumulative voting.
C. No, because trying to take over the corporation is a perfectly legitimate activity for a director.
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