Essay 2 -- Business Judgement rule, liability, Board approval, excuplatory articles of provisions

Question 1

What do directors owe to their org?

Answer 1

1) a duty of loyalty
2) a duty of care

Question 2

To violate a duty of loyalty, what must be shown of a director?

Answer 2

1) they received a personal benefit from the transaction they approved
or
2) they stood on both sides of the transactions being approved

Question 3

How can directors fail their duty of care?

Answer 3

1) by failing to exercising care in informing themselves about the transactions they were approving

Question 4

What duty do directors have under the duty of care?

Answer 4

Per the MBCA, they have a duty to exercise an informed business judgement and must excercise care in being informed

Question 5

What is generally subject to the BJR?

Answer 5

The excercise of managerial powers by a director

Question 6

What is the business judgement rule?

Answer 6

A presumption, that in making a business decision, directors of a Corp acted on an informed basis, in good faith, and in honest belief the action taken was the best interest in a cimpany

Question 7

If a party is seeking to rebut the BJR, what must they show?

Answer 7

If attacking a board decision as uninformed, they must defeat the presumption that a boards BJ was an informed one.

Question 8

To excercise adequate care in becoming informed, what can a board do?

Answer 8

1) ask how fair market value was determined
2)employ an independent party to evaluate properties being purchased

Question 9

In performing a duty to become informed, what can directors rely on?

Answer 9

Info, opinions, reports, or statements of corporate officers UNLESS they have knowledge that reliance is unwarranted.

Question 10

Under the MBCA, when is a director not protected from liability in reliance on corporate officers information?

Answer 10

If they have knowledge that makes reliance unwarranted.

Question 11

IF a director stands on both sides of a transaction, what law is not applied?

Answer 11

The BJR is NOT applied.

Question 12

Under the MBCA, when is a director liable to a corporation?

Answer 12

When the party asserting liability asserts elements like
–receipt of financial benefit by the director to which director is not entitled
– Other actionable breach of duty by the director to deal fairly with the Corp

Question 13

If directors are on both sides of a transaction, what burden do they have?

Answer 13

The burden to establish the entire fairness of the transaction.

Question 14

If transactions are approved by a disinterested board of directors, what are they generally subject to?

Answer 14

The business judgement rule and party challenging would have to show the transactions were unfair or even prove they constituted waste.

Question 15

Approval by fully informed disinterested directors permits
invocation of the business judgment rule and limits judicial review to issues of _____ ______ with the burden of proof ____ ___ ______ _______ ___ ________

Answer 15

gift or waste
upon the party attacking transaction

Question 16

In a model act juris, a transaction approved by a disinterested board may fall under _____ _______ and is _________ ____ ______

Question 17

When will approval by a disinterest board not trigger BJR?

Answer 17

if the director has not disclosed all material facts about the director’s
interest in the transaction.

Question 18

What does required disclosure mean to trigger the BJR?

Answer 18

all facts known by the director
respecting the subject matter of the transaction
that an ordinarily prudent person would
reasonably believe
to be material to a judgment about whether or not to proceed with the transaction.

Question 19

What does an exculpatory provision in a corporations article of incorporations include?

Answer 19

1) a provision shielding its directors
2) from liability for money damages
3) for the failure to exercise adequate care in the performance of their duties as directors.

Question 20

What types of exculpatory provisions does Delaware allow? And what do they not allow for?

Answer 20

provisions that protect directors from liability for breaches of the duty of
care,

but does not permit provisions that protect directors from liability:
for any breach of the duty of loyalty
for acts or omissions that are not in good faith
or for any transactions from which the director received an improper personal benefit.

Question 21

What does the MBCA permit exculpatory provisions? And not permit?

Answer 21

Model Business Corporation Act permits provisions:
that protect directors from liability for breaches of the duty of care,
2) does not permit provisions
that limit or eliminate liability “for the amount of a financial benefit received by a director to which he is
not entitled.”

Question 22

What are a few types of behavior that would not be protected by an exculpatory provisions?

Answer 22

1) engaging in self dealing
2) usurped corporate opportunity
3) excessive compensation

Question 23

What does not establish bad faith? What does?

Answer 23

Negligence… Gross negligence

Question 24

What do exculpatory provisions not protect directors for?

Answer 24

Actions under taken in bad faith or in breach of duty of loyalty (like improper personal benefit)