Fiduciary Duties Flashcards
BoD Duty of Care
*Duty to act with the care of an ordinarily prudent person in a like position and similar circumstances (objective standard)
*Reliance: A director is entitled to rely on the performance of other officers, employees, and outside experts
*Business Judgment Rule: (see other card)
Business Judgment Rule
A rebuttable presumption
that a director reasonably believed his actions were in the best interest of the corporation.
Will protect a director from liability for breaching the duty of care
if he acted in good faith.
To overcome, one of the following must be shown:
(i) The director did not act in good faith
(ii) The director was not informed to the extent reasonably necessary before
making a decision
(iii) The director did not show objectivity and had a material interest in the decision
(iv) The director failed to timely investigate after being alerted to a significant
matter
(v) Any other failure to act as a reasonable director
BoD Duty of Loyalty
Requires director to act in a manner director reasonably believes is in the best interest of the corporation
Self-Dealing and Usurping Corporate Opportunities are violations
BoD Self-Dealing
Self-Dealing – a director engaging in a transaction with a corporation that benefits himself or a closely related family member, or another corporation or partnership that the director or close family member is associated with
Violates duty of loyalty unless it is protected under the safe harbor rule
The business judgment rule does not apply to self-dealing
Remedies: self-dealing transaction can be enjoined or rescinded and corporation can seek damages from the interested director
Safe Harbor Rule
Three ways self-dealing transaction can be protected and avoid violating duty of loyalty
1) The interested director discloses all material facts to the board of directors and receives approval by a majority of disinterested board of directors; or
2) The interested director discloses all material facts to shareholders and receives approval by a majority of disinterested shareholder votes; or
3) Fairness. The transaction is fair to the corporation at the time of the deal.
Test:
i) Is the substance of the transaction fair and
ii) Is the burden on the interested
director to show fairness.
BoD Usurpation of Corporate Opportunity
A director may violate the duty of loyalty by taking a corporate opportunity for business for himself rather than offering it to the corporation first.
If director must present the corporate opportunity to the corporation first, and it is declined by the corporation, the director can take it himself
Corporate Opportunity:
Is the corporation is seeking the opportunity OR is the opportunity is within the corporation’s current or prospective line of business.
BoD Fiduciary Duties
Two basic duties owed: duty of care and duty of loyalty
