FACT PATTERN 3: DIRECTORS AND OFFICERS (HEAVILY TESTED)- ROLE OF DIRECTORS/DUTY OF CARE/DUTY OF LOYALTY

Question 1

what does the BOD do?

Answer 1

Generally, the board of directors manages the business of a corporation, it sets policy, supervises officers, declares distributions, determines when stock will be issued, recommends fundamental corporate changes to shareholders, etc.

Question 2

The board can delegate to a committee of one or more directors. But a committee cannot do what? why?

Answer 2

Can’t fill vacancies on the board and can’t declare dividends. You need the full board for that.

Question 3

Can a committee recommend filling vacancies on the board or declare dividends to the full board for its action?

Answer 3

Sure, just can;t do it themselves.

Question 4

Who has the burden of proving a breech of the duty of care by a director?

Answer 4

The plaintiff

Question 5

What is the directors Duty of Care Standard?

Answer 5

A director owes the corporation a duty of care. She must act in good faith and do what a prudent person would do with regard to her own business.

Question 6

What is nonfeasance?

Answer 6

The director does nothing.

Question 7

Justin Timberlake, a director of C Corp., fails to attend any of the board of directors’ meetings or to keep abreast of the company business in any way. Will he be held liable for breach of the duty of care? Why or why not? (do all the steps)

Answer 7

Maybe, A director owes the corporation a duty of care. She must act in good faith and do what a prudent person would do with regard to her own business.
A prudent person would attend some meetings and do some work. Justin never did anything, so he has breached the duty of care.
But he is only liable if his breach caused a loss to the corp.

Question 8

What is misfeasance?

Answer 8

the board does something that hurts the corporation – so causation in these cases is clear

Question 9

The directors of Hedonists’ Hot Tubs, Inc. vote to start a new line of hot tubs with built-in wine coolers. The idea is a disaster and the corporation loses money. Are the directors liable for breach of the duty of care? Why or why not (do all the steps)?

Answer 9

A director owes the corporation a duty of care. She must act in good faith and do what a prudent person would do with regard to her own business.
Here, the directors’ action caused a loss to the corporation and was arguably imprudent given that it turned out badly. BUT, a director is not liable if she meets the business judgment rule (“BJR”).

Question 10

Define the BJR.

Answer 10

A court will not second-guess a business decision if it

(1) was informed
(2) was made in good faith
(3) was made without conflicts of interest, and
(4) had a rational basis.

Question 11

Is a director a guarantor of success?

Answer 11

No, and the BJR recognizes that.

Question 12

Who has the burden to show a breech of loyalty by a director?

Answer 12

Burden on the defendant,

Question 13

What is the duty of loyalty standard?

Answer 13

A director owes the corporation a duty of loyalty. She must act in good faith and with a reasonable belief that what she does is in the corporation’s best interest.

Question 14

Does the BJR apply in breech of duty of loyalty cases?

Answer 14

No

Question 15

Why does the BJR NOT apply in duty of loyalty cases?

Answer 15

The BJR never applies when there is a conflict of interest.

Question 16

What is an interested director transaction?

Answer 16

any deal between the corporation and one of its directors, or a close relative of a director, or another business of the director

Question 17

Phil is a director of INeedADildoInMyAss.Com, Inc. If he sells fleshlights (from his other business) to INeedADildoInMyAss.Com, Inc, is it an interested director transaction?

Answer 17

First, Phil is a dirty dirty man. Just disgusting, Phil.

And yes, it is an interested transaction.

Question 18

How would you do the analysis of liability for a self dealing transaction? (state the steps)

Answer 18

(State the duty of loyalty standard) A director owes the corporation a duty of loyalty. She must act in good faith and with a reasonable belief that what she does is in the corporation’s best interest.

The interested director transaction will be set aside (or the director will be liable in damages) UNLESS the director shows either:
(1) the deal was fair to the corporation when entered, OR
(2) her interest and the
relevant facts were disclosed or known and the deal was approved by either a majority of disinterested diretors or the majority of disinterested shares.

Question 19

What is the special quorum rule?

Answer 19

In many states, interested directors count toward a quorum.

Question 20

Even if the deal is approved by an appropriate group, what should you write in an essay (for a breech of loyalty decision)?

Answer 20

“Some courts also require a showing of fairness even if disinterested directors or disinterested shares approved it.”

Question 21

Under what circumstances can directors set their own compensation as directors or officers?

Answer 21

it must be reasonable and in good faith

Question 22

Mita is a director of CurryMaMa Inc. can she also be a director of Phil’s corporation, INeedADildoInMyAss.Com? Why or why not?

Answer 22

Yes, because they are not competing businesses.

Question 23

Mita is a director of CurryMaMa Inc. can she also start a curry business? (do the analysis)

Answer 23

No. (State the duty of loyalty standard)- A director owes the corporation a duty of loyalty. She must act in good faith and with a reasonable belief that what she does is in the corporation’s best interest.

A director cannot compete with her corporation. A director is a fiduciary.

Question 24

What is the remedy against Mita for her competing venture?

Answer 24

constructive trust on Mita’s profits for her new curry business.

Question 25

Can a director usurp a corporate opportunity?

Answer 25

Generally, no (violation of duty of loyalty)

Question 26

What must a director do to act on a corporate opportunity himself?

Answer 26

(1) tells the board about it and

(2) wait for the board to reject the opportunity.

Question 27

Cheatem is a director of C Realty Corp., which develops condo projects. Cheatem learns of some land that has been zoned for condos and buys it for himself as an investment. What are C’s rights, if any, against Cheatem?
Do the analysis (all the steps)

Answer 27

(State the duty of loyalty standard)- A director owes the corporation a duty of loyalty. She must act in good faith and with a reasonable belief that what she does is in the corporation’s best interest.
Director cannot usurp a corporate opportunity.
That means the director cannot take it until he (1) tells the board about it and (2) waits for the board to reject the opportunity.

Question 28

What are the 3 tests to define a corporate opportunity?

Answer 28

1. Some say it’s something in the corporation’s line of business.
2. Something that the company has an interest or expectancy in.
3. Or something the director found on company time or with company resources.

Question 29

Is the company’s financial inability to pay for a corporate opportunity a defense?

Answer 29

No in most jurisdictions.

Question 30

What is the remedy for a director taking a corporate opportunity in violation if his duty of loyalty?

Answer 30

he must sell it to the corporation at his cost. If the director has sold it at a profit, the corporation gets the profit (constructive trust).