Fiduciary Duty of Care – The Business Judgment Rule Flashcards
Business Judgment
BJ is a presumption that is rebuttable
Triad of Fiduciary Duty
Care
Loyalty
Good faith
Duty of Care
The business judgment rule applies to the duty of care. Care is assumed unless the person who is alleging a breach of this duty can present clear and convincing evidence that the duty was not upheld. The duty of care applies to situations in which a member of the corporation makes a binding decision for the corporation (usually a officer or director). The person making the decision has a duty of care which has been defined by case law, but can generally be stated as a duty to undertake a diligent investigation and consider viable options before making a decision.
Duty of Loyalty
one has a duty to bring any opportunity for making money, or that would otherwise be of benefit to the corporation, to the attention of the corporation, and to act on it in a personal capacity only after the corporation has had an opportunity turn it down.
Duty of Goodfaith
a duty of one to act in good faith and evenhandedly when dealing with the corporation.
Business Judgement Rule
A court will not interfere with the decision of a company’s directors unless there is evidence of fraud or dishonest practice.
BJR Presumpton & Shielding
- Under the business judgment rule, a business judgment is presumed to be an informed judgment, but the judgment will not be shielded under the rule if the decision was unadvised.
Duty of Care Standard for BJR
Gross negligence is the proper standard for determining whether the business judgment was an informed one.
WHAT TO DO TO PREVENT VAN GORKUM LIABILITY:
- Do research,
- Get an outside opinion, a “fairness certificate,” and
- Provide adequate documentation of the decision-making process (of course skewed in the board’s favor).
Reliance on Uninformed Officers
- Other officers not personally liable because they relied in good faith on reports of another officer
- The implication is they don’t need to question the accuracy of an uninformed officer
Shareholder Ratification
- Valid ratification cures duty of care violation by board
- No Ratification where SH were not informed of all material facts that a reasonable SH would consider important
Standard of Care for Directors
- Reasonably prudent director in similar circumstances in like positions
- A director has a fiduciary duty to support the corporation’s interest over his or her own conflicting interests, and any competing interests renders the business judgment rule inapplicable.
When can a Director be held personally liable?
A director can be personally liable, even to third parties, if they neglect to provide the ordinary care of staying current with corporate affairs as one would normally do in that position, and that neglect is the proximate cause of the damages.
Minimum Duties of Director
- Rudimentary understanding of business
- Cannot shut eyes to misconduct
- Read financial statements
- Reliance on professionals is ok
- Resignation protects them sometimes
- Duty to SH or Creditors?
- Depends on whether company is solvent
- If solvent - SH
- If insolvent - creditors
- Solvent = assets worth more than liabilities
- Depends on whether company is solvent
BJR Summarized
- Evidentiary presumption that directors acted with good faith and in the best interest of their shareholders.
- The business judgment rule will not be used to second guess admittedly bad decisions of directors.
- However, the business judgment rule will not be observed if it is proved that the directors did not act with the requisite duty of care.
- In Van Gorkum this meant that they must consider all available information when making decision. Directors are able to rely on reports given to them by experts or other directors without examining the due diligence of the parties giving the report.
- After Van Gorkum the law was amended in every state to allow provisions to be put into a corporate charter to exempt executives for money damages for the breach of due care, however a breach of good faith will leave executives open to liability.
Duty of Loyalty
- The duty of loyalty trumps the business judgment rule.
- Directors have no power to act outside of meeting
- Test: entire fairness, not BJ
Corporate Opportunity Doctrine
The corporate opportunity doctrine is the legal principle providing that directors, officers, and controlling shareholders of a corporation must not take for themselves any business opportunity that could benefit the corporation.
WHEN IS AN OPPORTUNITY IN THE CORP’S LINE OF BUSINESS:
An opportunity is within the corporation’s line of business when it is an activity as to which the corporation has fundamental knowledge, practical experience, and the ability to pursue
SH Loyalty
- Unlike a director, a shareholder, majority or otherwise, is entitled to vote in a manner that is most beneficial to their interests.
- Majority SH can be selfish, but the minority SH deserve to gain from it
Ratification
not voidable if approved on full disclosure by indep board members
Taint of Vote
- For proper ratification, director w conflict of int would have to leave the room
- Its not void just because there is taint
- Still requires Ratified by a majority of SH who are independent
- This eliminates taint as well
- Still requires Ratified by a majority of SH who are independent
Duty of Loyalty Summarized
- The essence of the duty of loyalty is a conflict of interest. There is a presumption of good faith, care, and loyalty. The courts will not second guess business judgment decisions unless gift or waste can be proved.
- If there is a violation of good faith, care, or conflict of interest they must show entire fairness. The fiduciary can seek ratification from the non-conflicted shareholders, but full disclosure must be provided for ratification to be valid.
- The same goes with conflicted directors. The ratification is not tainted by the participation of the conflicted board members.
- If ratified gift or waste must be proved to challenge it, the burden is shifted to the shareholder to show complete unfairness.
Preferred Stock
- Preferred in dividends:
- entitled to mandatory dividends before dividends paid on common
- Preferred in liquidation:
- has face value in liquidation, paid in preference to common
Participating Preferred
Get % of common divs
