Fiduciary duties and organizational structure

Question 1

duty of care

Answer 1

Directors and officers owe the corporation a fiduciary duty of care. This duty includes:
(1) The duty to take reasonable steps to monitor the corporation’s management;
(2) The duty to be satisfied that proposals are in the corporation’s best interests;
(3) The duty to disclose material information to the board; AND
(4) The duty to make reasonably informed decisions.
(a) In making such decisions, directors and officers may rely on information
from others whom they reasonably believe are reliable.

Question 2

Business judgment rule

Answer 2

In suits alleging that a director or officer violated his duty of care owed to the
corporation, courts will apply the business judgment rule. Under this rule, a court will
NOT second guess the decisions of a director/officer so long as the decisions are made:
(1) In good faith;
(2) With the care an ordinarily prudent person in a like position would exercise
under similar circumstances; AND
(3) In a manner the director/officer reasonably believes to be in the best interests
of the corporation.

Question 3

duty of loyalty

Answer 3

In suits alleging that a director or officer violated his duty of care owed to the
corporation, courts will apply the business judgment rule. Under this rule, a court will
NOT second guess the decisions of a director/officer so long as the decisions are made:
(1) In good faith;
(2) With the care an ordinarily prudent person in a like position would exercise
under similar circumstances; AND
(3) In a manner the director/officer reasonably believes to be in the best interests
of the corporation.

Question 4

safe harbors

Answer 4

A director/officer that enters into a conflicting interest transaction may
be protected from liability if:
(1) Disinterested shareholders approve the conflicting interest transaction;
(2) The non-interested members of the board authorize the conflicting interest
transaction; OR
(3) The transaction, judged according to the circumstances at the time of
commitment, is established to have been fair to the corporation.

Question 5

Corporate opportunity doctrine

Answer 5

The corporate opportunity doctrine prohibits directors and officers from usurping
business opportunities that rightfully belong to the corporation for their own benefit.

Question 6

Merger

Answer 6

A merger occurs when one of two existing corporations is absorbed by the other
corporation. A consolidation occurs when two existing corporations combine into one
new corporation. A merger or consolidation both require:
(1) The recommendation of an absolute majority of the board of directors; AND
(2) The agreement of each corporation by an absolute majority of shareholders.

Question 7

Short term merger

Answer 7

In many states, if a parent corporation owns at least 90% of the
stock of a subsidiary, the subsidiary may be merged into the parent without approval
from the shareholders of either corporation.

Question 8

dissenter’s rights

Answer 8

After a merger or consolidation takes place, dissenting shareholders opposed to the
merger or consolidation may either:
(1) Challenge the action; OR
(2) Receive payment determined at the fair market value of their shares
immediately before the merger/consolidation took effect.
(a) A dissenting shareholder who opts to receive fair market value for their
shares loses the right to challenge the action absent a showing of fraud.

Question 9

sales of substantially all corporate assets

Answer 9

Shareholder approval is required for the corporation to sell, lease, exchange, or
otherwise dispose of all, or substantially all, of its property if the disposal is NOT in the
corporation’s usual and regular course of business. However, if the disposal of assets is
in the corporation’s usual and regular course of business, shareholder approval is NOT
required (unless otherwise set forth in the articles of incorporation).