Lawsuits Against the Board of Directors

Question 1

What is the business judgment rule?

Answer 1

A presumption that in making a decision, the directors acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the corporation.

Question 2

How may the BJR be rebutted?

Answer 2

1. Care: prove the board was uninformed (process review)
2. Loyalty: prove the corporation didn’t get a fair deal viz. the fairness test
3. Good Faith: show there was an intentional dereliction of duty

Question 3

What do we assess in determining whether a party is obliged to present an opportunity to the company (Guth)?

Answer 3

1. Financial capacity
2. Line of business
3. Interest or expectancy
4. Inimical to duties to take
5. Practical advantage to it

Question 4

Why do dominant shareholders have a fiduciary duty?

Answer 4

Because (1) they can control the board and (2) their interests may diverge from those of other shareholders.

Question 5

What is a dominant shareholder?

Answer 5

One with enough shares to determine the outcome of a shareholder vote.

Question 6

When will the intrinsic fairness standard govern?

Answer 6

When there is self-dealing.

Question 7

When will the BJR apply to a controlling shareholder transaction?

Answer 7

If there is (1) a favorable vote of minority shareholders and (2) an approving vote of the disinterested directors (MFW).

Question 8

What is bad faith?

Answer 8

An intentional dereliction of duty, a conscious disregard for one’s responsibilities (Disney).

Question 9

What is waste?

Answer 9

A use of resources so one sided that no business person of ordinary, sound judgment could conclude was reasonable.

Question 10

When will directors be liable for failure to engage in proper corporate oversight?

Answer 10

1. If they fail to implement a reporting or info system or controls; or
2. If they consciously fail to monitor such a system.

Question 11

In DE, when is demand excused for stupidity (Aronson)?

Answer 11

1. majority has an interest at stake
2. majority is controlled by someone with an interest
3. Underlying transaction is not a valid exercise of business judgment

Question 12

In NY, when is demand excused?

Answer 12

1. if a majority of the directors are interested in the transaction; or
2. The directors failed to inform themselves; or
3. The directors failed to exercise their business judgment in approving the transaction.

Question 13

In NY, when will demand dismissal be granted BJR protection?

Answer 13

If the board delegates that power to an SLC of disinterested members (Auerbach).

Question 14

What do DE courts ask regarding SLC dismissal?

Answer 14

1. whether the SLC acted independently, in good faith and with reasonable investigation; and
2. Whether the dismissal passes independent judicial inquiry into business judgment (policy).