Fiduciary Duty Law

Question 1

Standards of Director Conduct:

Answer 1

• The director must act in good faith
• The director must act in a manner he reasonably believes to be in the best interests of the corporation
• See MBCA § 8.30(a)
• Standards apply across the board:
  
  1. Duty of Care
  2. Duty of Loyalty
  3. Duty of Attention
  4. Duty of Disclosure
  5. Duty of Informed Judgment
  6. Fiduciary Duty generally

Question 2

Van Gorkem

Answer 2

• Board was not adequately informed and breached their duty of care.
  
  • Business Judgment Rule: Gives deference to business judgment as long as directors discharged their duties in good faith, with prudent care, and in a manner they reasonably believed was in the best interest of the company
  • Must establish gross negligence to overcome business judgment rule (acting on basis of insufficient information will do this)

Question 3

Duty of Care

Answer 3

• The director must discharge his duties with the care that a person in a like position would reasonably believe appropriate under similar circumstances. See MBCA § 8.30(b)
• Standard applies when the board is “becoming informed” in its decision-making function
  
  • Director must become familiar with the facts and circumstances such that an informed decision can be made
• Standard applies when the board is “devoting attention” to its oversight function
  
  • Director must gain assurances that adequate information and reporting systems are in place and give due regard to ongoing monitoring of such systems

Question 4

Business Judgment Rule

Answer 4

• Court defers to judgment of board by presuming that:
  
  • The director acted in good faith;
  • The director acted in a manner he reasonably believed to be in the best interests of the corporation; and
  • The director discharged his duties with the care that a person in a like position would reasonably believe appropriate under similar circumstances

Question 5

Management’s Use of Defensive Tactics

Answer 5

• Board may act to maintain proper business practices but may not act to entrench itself. If there is an inherent conflict of interest, directors have the burden of proof of showing reasonable grounds to believe a danger to corporate policy and effectiveness existed.
  
  • This can be met by showing good faith and reasonable investigation
  • It doesn’t make sense to apply the business judgment rule because of the inherent conflict of interest present in this situation

Question 6

The Fiduciary Duty of Candor

Answer 6

• The majority shareholder owes a fiduciary duty to minority shareholders, which requires complete candor in disclosing fully all of the facts and circumstances surrounding the tender offer.
  
  • Must disclose all material information in their possession.
    
    • Material = information that a reasonable shareholder would consider important in making her decision and would be viewed as altering the total mix of information
• When shareholder action is requested, directors are obligated to disclose all material information within the board’s control
• When disseminating information but not requesting shareholder action, the directors have to comply with general fiduciary duties of care, loyalty, and good faith

Question 7

Does Delaware recognize fraud on the market claims?

Answer 7

No

Question 8

Does Delaware provide protection for shareholders when corporation deliberately disseminates misleading information?

Answer 8

Breach of generalized fiduciary duty, so shareholders can file a derivative suit

Question 9

The term “manipulative” as used in §14(e) requires :

Answer 9

misrepresentation or nondisclosure.

Question 10

Purpose and legislative history of the 14(e)

Answer 10

• Nowhere in the history suggests that section 14(e) serves any purpose other than disclosure, or that the term “manipulative” should be read as an invitation to the courts to oversee the substantive fairness of tender offers
  
  • Inject uncertainty into the tender offer process –> court would have to decide whether one form was fair to the shareholders over a different form; just want the parties to comply with the Williams Act

Question 11

Unocal Enhanced Scrutiny

Answer 11

• Enhanced business judgment rule (inherent conflict of interest):
  
  • Directors must show that they had reasonable grounds for believing that a danger to corporate policy and effectiveness existed
    
    • Satisfied by showing good faith and reasonable investigation
  • The defensive device implemented is reasonable in relation to the threat posed
    
    • Court will look at the nature of the bid and the likely impact it will have on the corporate enterprise

Question 12

“Flip-Over” =

Answer 12

rights relate to purchase of Bidder Stock

Question 13

“Flip-In” =

Answer 13

rights relate to purchase of Target stock

Question 14

“Bust-UP” =

Answer 14

takeover ultimately financed by sale of parts of Target

Question 15

“Dead Hand Pill” =

Answer 15

can be removed only by directors initially adopting it

Question 16

“Jonestown Defense” or “Suicide Pill” =

Answer 16

target undertakes activity that may destroy company

Question 17

“Pac Man” =

Answer 17

target becomes Bidder for Bidder

Question 18

Lock Up Option

Answer 18

• Not illegal per se, and situations where it might help facilitate getting bids
• But in this case, it was used to stop other bidders

Question 19

No shop agreement:

Answer 19

• Not per se illegal, and may be appropriate in other contexts
• It is impermissible under the Unocal standards when a board’s primary duty becomes that of an auctioneer responsible for selling the company to highest bidder

Question 20

Flip-In vs. Flip-Over

Answer 20

• Flip-in = right to buy stock of the targeted company at a discount
• Flip-over = right to purchase equity of the acquiring corporation at a discount

Question 21

Two ways a tender offer can be a threat:

Answer 21

• Threats to voluntariness (basically when the offer creates a stampede)
• Threats from inadequate but noncoercive offer (even if offer is not coercive, it might be inadequate and thus pose a threat)
  
  • Limits: Pill can stay so long as board is trying to negotiate a better price for the shareholders
    
    • If you’re simply leaving it there and not negotiating, auctioning, etc. then you have to withdraw the poison pill

Question 22

Lee Builders v. Wells test for liquidated damages:

Answer 22

• To be a valid liquidated damages provision:
  
  • The damages that would result from a breach of the merger agreement must be uncertain or incapable of accurate calculation, AND
  • The amount agreed upon must be reasonable.
    
    • Factors to determine whether amount is reasonable:
      
      • The anticipated loss by either party should the merger not occur
      • The difficulty of calculating that loss (greater the difficulty, the easier it is to show that the amount is reasonable)

Question 23

Williams v. Geier wrongful coercion:

Answer 23

Wrongful coercion that nullifies a stockholder vote may exist where the board or some other party takes actions which have the effect of causing the stockholders to vote in favor of the proposed transaction for some reason other than the merits of that transaction.