Learned from MEE Model Answers Flashcards
Proper purpose needed to ask for what?
Under the MBCA, a “proper purpose” need not be shown for the inspection of minutes of shareholders’ meetings. See MBCA §§ 16.01(e), 16.02(a).
But here the shareholder asked for board minutes, for which a “proper purpose” must be shown. (also need proper purpose to look at affairs and books of corporation; give 5 days to respond, then review at offices during normal business hours)
What if SH denied inspection?
Under the MBCA, the board can seek dismissal of the shareholder’s derivative action if a majority of the board’s “qualified directors”—those directors who do not have a material interest in the derivative action, see MBCA § 1.43(a)(1)—determine in good faith, after conducting a reasonable inquiry upon which its conclusions are based, that continuance would be contrary to the corporation’s best interests. MBCA § 7.44(a) & (b). Although the Official Comment to MBCA § 7.44 suggests that a full-blown board investigation is not necessary, the board’s request for dismissal must have “some support in the findings of the inquiry.” Failure to investigate credible allegations of corporate illegality constitutes lack of “good faith.” Stone v. Ritter, 911 A.2d 362, 364–65 (Del. 2006) (stating that directors breach duty of good faith if they “knew or should have known” of violations of law and failed to act).
What can board do if they do not believe SH derivative action is legit?
Under the MBCA, the board can seek dismissal of the shareholder’s derivative action if a majority of the board’s “qualified directors”—those directors who do not have a material interest in the derivative action, see MBCA § 1.43(a)(1)—determine in good faith, after conducting a reasonable inquiry upon which its conclusions are based, that continuance would be contrary to the corporation’s best interests. MBCA § 7.44(a) & (b). Although the Official Comment to MBCA § 7.44 suggests that a full-blown board investigation is not necessary, the board’s request for dismissal must have “some support in the findings of the inquiry.” Failure to investigate credible allegations of corporate illegality constitutes lack of “good faith.” Stone v. Ritter, 911 A.2d 362, 364–65 (Del. 2006) (stating that directors breach duty of good faith if they “knew or should have known” of violations of law and failed to act).
Directors breach their fiduciary duties by failing to act upon “red flags” of
corporate illegality.
The “good faith” standard requires that directors, among other things, not approve (or condone) wrongful or illegal activity
In addition, the duty to act in good faith requires corporate directors to establish procedures to ensure
the corporation’s compliance with legal norms. See Stone v. Ritter, supra, at 369–70. Thus, courts have required corporate directors to establish “[corporate] information and reporting systems” that provide “timely, accurate information . . . concerning both the corporation’s compliance with law and its business performance.”
BJR restatement
When does BJR apply?
In basic principle, a board of directors enjoys a presumption of sound business judgment . . . that, in making a business decision, directors act in good faith, on an informed basis, and in the honest belief that the action taken is in the best interests of the corporation
business judgment rule applies “unless there is a showing of fraud, illegality, or conflict of interest”
A “director’s conflicting interest transaction” (that is, a director self-dealing transaction) is not absolutely
prohibited. Instead, modern corporate law permits such transactions—with the consequence that the business judgment rule applies if, after full disclosure of all relevant facts, qualified directors authorized the transaction.
Even if the sale of the tower was not properly authorized, the directors can satisfy their fiduciary duty of loyalty by showing that “the transaction, judged according to the circumstances at the relevant time, was fair to the corporation.” See MBCA § 8.61(b)(3); see also Marciano v. Nakash, 535 A.2d 400, 405 n.3 (Del. 1987).
The directors have the burden to show that the transaction as a whole was fair in terms of “fair price” and “fair dealing.” This means courts will inquire into
(1) whether the transaction price was comparable to what might have been obtained in an arm’s-length transaction, given the consideration received by the corporation, and (2) whether the process followed by the directors in reaching their decision was appropriate. See Official Comment 6 to MBCA § 8.60. A breach of the directors’ duty to deal fairly with the corporation can result in personal liability. See MBCA § 8.31(a)(2)(v) (receipt of financial benefit to which director not entitled under applicable law).
Internal affairs of the corporation, such as the conduct of shareholder meetings and election of directors, are subject to
the corporate law of the state of incorporation.
the MBCA was revised in 2009 to address shareholder nomination of directors in public corporations (known as “proxy access”) and specifies that
the bylaws “may contain . . . a requirement that . . . the corporation include in its [proxy materials] one or more individuals nominated by a shareholder.”
The Delaware Supreme Court has confirmed that the bylaws may “define the process and procedures” for director elections. (eg, Court concluding that bylaw amendment requiring reimbursement of election expenses to certain successful shareholder nominators is
“proper subject” under Delaware law).
Although shareholders are generally limited to adopting precatory resolutions that recommend or encourage board action (and gen’lly must leave business and affairs to the board), this limitation does not apply when
shareholders have specific authority to take binding action on their own—such as to amend the bylaws.
Who has power to amend bylaws?
Generally, SH’s do. The board also does, unless (1) the corporation’s articles “reserve that power exclusively to the shareholders” or (2) “the shareholders in amending, repealing, or adopting a bylaw expressly provide that the board of directors may not amend, repeal, or reinstate that bylaw.” See MBCA § 10.20(b).
Further, a shareholder-approved bylaw generally can limit the power of the board to later amend or repeal it.
While SH’s can limit right of Board to amend bylaws, what can Board still do?
Tinker, as to make practicable.
a shareholder-approved bylaw dealing with director nominations may not limit the board’s power to amend, add, or repeal “any procedure or condition to such a bylaw in order to provide for a reasonable, practicable and orderly process.” MBCA § 2.06(d). Thus, according to the revision, if shareholders approve a bylaw amendment that limits further board changes, the board would nonetheless retain the power to “tinker” with the bylaw to safeguard the voting process, but could not repeal the shareholder-approved bylaw. The Official Comment to MBCA § 2.06(d) makes clear that the revision is “not intended to allow the board of directors to frustrate the purpose of the shareholder-adopted proxy access . . . provision.”
What if board attempts to thwart future SH attempt to make a voting initiative
This could be a breach of fiduciary duty.
The board’s attempted interference with a shareholder voting initiative may also have been a violation of the directors’ fiduciary duties. See Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988) (finding that directors breached their fiduciary duties by amending bylaws and expanding size of board to thwart insurgent’s plan to amend bylaws and seat a majority of new directors).
Nature of a derivative suit
A derivative suit is essentially two suits in one, where the plaintiff-shareholder seeks to bring on behalf of the corporation a claim that vindicates corporate rights, usually based on violation of fiduciary duties. PALMITER, supra, § 18.1.1 (6th ed. 2009). The demand permits the board to investigate the situation identified by the shareholder and take suitable action. No demand on the board is required, however, if the shareholder brings a direct suit to vindicate the shareholder’s own rights, not those of the corporation.
