FIDUCIARY DUTIES

Question 1

3 things Directors must do to act accordingly to the duty of care

Answer 1

1. act on an informed basis
2. devote sufficient time to their decision
3. acquire opinions from an independent expert

Question 2

why is the care only procedural? (2)

Answer 2

1. courts are not business experts, so it would be difficult for them to review whether the decision was good or not
2. it is not fair to review a decision on hindsight basis

Question 3

5 cases in which the business judgement rule is rebutted

Answer 3

1. Director acted in conflict of interest
2. Director failed to inform himself
3. knowing violation of criminal law
4. reasonable investigation by the Board was missing
5. the decision was completely irrational & wasteful

Question 4

why was the business judgement rule created?

Answer 4

1. courts are NOT business experts
2. incentive for decision-makers to take risks (it’s better to lose money for a managerial error made with sh best interests at heart), if they have malicious misconduct there is judicial intervention in any case
3. hindsight review of business is inconsistent with sh interests bc:
   - limited liability insulates sh from losses
   - sh can diminish risks through diversification
   - managers may become risk-averse for risks that sh would tolerate
   - if managers had to bear legal liability their interests would become very different from sh’s
   - knowing the consequence of a decision could bias judges into finding a breach of the duty of care

Question 5

2 types of conflicts of interest when considering the duty of loyalty

Answer 5

1. a gain of the director implies a loss or a lower gain for the corporation
2. the interests of the organisation & those of the Director align but still his ability to exercise judgement in the best interests of the company is tainted

Question 6

3 typical regulatory strategies when considering the duty of loyalty

Answer 6

1. all conflicted transactions are prohibited
2. conflicted transactions are not regulated at all
3. conflicted transactions are approved BUT are subject to procedural protections

Question 7

3 types of related parties

Answer 7

1. subject controls the other, is controlled by it, are controlled by the same entity
2. executives are related to the corporation
3. family members

Question 8

3 specific & substantive protections to approve transactions of major relevance with related parties

Answer 8

1. transaction is approved by BoD
2. a committee of independent directors is involved
3. Board can approve the transaction after having obtained the opinion of the committee

Question 9

2 remedies for breach of fiduciary duties

Answer 9

DUTY OF CARE: monetary damages +punitive damages (the Director has to pay back the corporation what what his decision caused)
DUTY OF LOYALTY: restitutionary (try to recreate the situation that would exist if the Director didn’t break duty of loyalty)