Fiduciary Duties of Directors or Officers Flashcards
Directors: Duty of Care and Nonfeasance
Requires directors to use the amount of care and skill a reasonably prudent person would reasonably be expected to exercise in a like position and under similar circumstances.
MBCA: Standard of Conduct for Directors
Each member of the board, when discharging duties of a director, shall act: (1) in good faith; and (2) in a manner the director reasonably believes to be in the best interest of the corporation.
Francis v. United Jersey Bank (NJ, 1981)
(F): Reinsurance broker commingling funds from customers account and operating account; Corporation goes bankrupt and gets sued by shareholders for violating fiduciary duties of care toward company.
(R): Director should acquire at least a rudimentary understanding of business of corporation.
(H): Wife was willfully blind about actions within Company; violation of duty of care.
Directors Duty of Loyalty
Avoid self-dealing and Conflicts of Interest; Good Faith
3 Kinds of Director Actions subject to Challenge:
(1) Decisions about corporate actions; (2) Oversight of corporate activity; (3) Conflict of Interest
BJR
Rebuttable Presumption: Directors’ decisions made on an informed basis, in good faith and in honest belief that the action is in the best interest of the corporation.
Standard Court uses to Review Director Decisions
Ordinary Business Decision = Duty of Care. If they do, then they have protection via BJR.
Duty of care violated when π shows directors engaged in self-dealing or acted in bad faith.
Shlensky v. Wrigley (IL COA, 1968)
(F) Wrigley owns Chicago Cubs; Shareholder of parent company are made and file derivative suit, alleging Wrigley/Directors violated their fiduciary duties to company by not putting lights up on the stadium.
(R) Shareholder can only sue director for breach of fiduciary duty if director’s actions constitute fraud, illegality, or conflicts of interest (duty of care).
(H): BJR applies; no evidence of negligence or conflicts of interest; Motives of Wrigley were not shown to be contrary to best interests of corporation; complaint does not allege fruad, illegality, or conflict of interests in making BJ decision.
Smith v. Van Gorkum (DE SC, 1985)
(F) Van Gorkum is CEO/Chairman of Transunion; Decided to merge the company with another to solve extra tax credits issue (offering profits of their own). VG makes merger happen really fast (board doesn’t really seem to have much say, doesn’t take long to decide). Shareholders sue, asserting sell price of company was too low and directors were poorly informed.
(R) Board can be liable for decision making process, if process was not sufficiently deliberate and well informed (directors personally liable).
(H) Director’s decsiion was not merely unwise, but poorly informed. Directors did not make informed decision and thus BJR did not protect them; personally liable.
DE Sec. 102(b)(7)
Allows corporations to include exculpation clause that eliminates or reduces personal liability of directors for monetary damages for breach of DUTY OF CARE (NOT loyalty). Insulates directors!
This was done in reaction to Smith v. Van Gorkum; where directors were held personally accountable for their decision to merge.
Exculpation applies ONLY to monetary damages.
DE Sec. 102(b)(7) RESTRICTIONS to Exculpation
SHALL NOT ELIMINATE:
(i) Director or officer of any breach of director or officer’s duty of loyalty to the corporation;
(ii) director or officer for acts for omissions not in good faith or which involve intentional misconduct or a knowing violation of law;
(iii) unlawful payment or dividends;
(iv) director or officer for any transaction form which director derived an improper personal benefit; or
(v) an officer in an action by or in the right of the corporation.
DE Interested Transaction:
Provides that interested-director or officer transaction will not automatically be void or voidable if either:
(A) There has been informed, disinterested majority board approval;
o Material facts about transaction and conflict are disclosed and board authorizes transaction by affirmative votes of majority of disinterested directors.
(B) And from shareholder approval in good faith; or
(C) Transaction is fair to corporation via court decision.
Benihana of Tokyo, Inv. v. Benihana, Inc. (DE, 2006)
(F) Owner starts a restaurant parent company, and subsidiary that is DE Corporation. Owner/Primary Stockholder sues to stop issuance of preferred stock, alleging breach of duty of loyalty. Stockholder claims board lacked sufficient information for an informed decision, and had conflict of interest because financial corporation owned by director was going to buy all the preferred stock.
(H) No wrongdoing by corporation. Conflicted director abstained from voting. Prong A of DE Safe Harbor for Duty of Loyalty Breach was satisfied: Informed, disinterested majority board approval.
DE law for valid interested transactions:
(1) Material facts about interest disclosed.
(2) Disinterested board approves in good faith.
Subsidiary board knew enough details:
Abdo was a director and buyer.
Abdo initiated contact for the purchase.
Directors Conflicting Interest Transaction:
Transaction by Corporation in which director:
(1) Is a party;
(2) Has a material financial interest, OR
- Material Financial Interest: One that would reasonably be expected to Impair directors judgment when authorizing transaction
(3) knowns that a related person is a party or had a material financial interest.
MBCA Procedural Safe Harbor for Conflicting Interest Transaction
Immune from attack IF:
Transaction authorized by majority of (A) qualified directors, (B) Disinterested shareholders, OR (C) court under a fairness standard.
Qualified Director
Someone who does not have conflicting interest in transactions, or one who has no material relationship with a conflicted director.
Court Determined Fairness:
Court looks at both procedure and substance to determine fairness:
Procedural Inquiry: Typically focuses on internal corporate process followed in obtaining approval by directors or shareholders.
Substantive Fairness: Focuses on a comparison of the fair market value of the transaction to the price the corporation actually paid or was paid, as well as the corporation’s need for an ability to consummate the transaction.
Bayer v. Beran (NY SC, 1944)
(F) Corporation’s direcotr hires wife to sing for advertisements. Shareholders sue claiming conflict of interest because director gets benefit to their household from transaction with his wife.
(H) Case dismissed for not violating duty of loyalty. Court says PURELY business decision; Fair dealing only.
Court examines personal transaction of directors with most scrupulous care.
- Personal transactions are void when there is evidence of improvidence or oppression, or indication of unfairness or undue advantage.
Court looks at everything to determine whether this was fair:
- Earnings, prior experience/hiring, adequate disclosure by the director, no evidence that this advertisement was to be used to foster or subsidize the wife’s career or furnish a vehicle for her talents.
