Officers and Other Employees Flashcards
What are the duties of officers and directors?
Duty of Care
Duty of Loyalty
What is the Duty of Care?
Business Judgement Rule
- In absence of fraud, illegality, or self-dealing, courts will not disturb good faith business decisions.
Standard
- Act with the care of a person in a like position would reasonably believe appropriate. But special skill must be used if you have.
Reliance defense: director or officer is entitled to rely on expertise of officers and other employees, outside experts, and committees of the board.
What is the Duty of Loyalty?
May not receive an unfair benefit to the detriment to the with effective disclosure and ratification.
Ex. Self-Dealing, usurping corporate opportunity.
However, will always be upheld if fair to corporation.
May be upheld if disclosed or ratified by a majority of disinterested directors or majority of disinterested shareholders. (shifts burden)
How can the business judgement rule be overcome?
To overcome the business judgment rule, it must be shown that:
i) The director did not act in good faith (e.g., consciously allowing conduct that violates the law or legal norms; intense hostility of the controlling faction against the minority; exclusion of the minority from employment by the corporation; high salaries or bonuses given, or corporate loans made to, the officers in control; and the existence of a desire by the controlling directors to acquire the minority stock interests as cheaply as possible);
ii) The director was not informed to the extent that the director reasonably believed was necessary before making a decision;
iii) The director did not show objectivity or independence from the director’s relation to or control by another having material interest in the challenged conduct;
iv) There was a sustained failure by the director to devote attention to an ongoing oversight of the business and affairs of the corporation;
v) The director failed to timely investigate a matter of significant material concern after being alerted in a manner that would have caused a reasonably attentive director to do so; or
vi) The director received a financial benefit to which he was not entitled, or any other breach of his duties to the corporation.
When is there required or mandatory, prohibited, or permissive indemnification if directors or officers?
Mandatory: When director or officer successfully defends the case.
Prohibited: director liable for receiving an improper benefit from the corporation or otherwise loses a suit.
Permissive: Suit when acted in good faith with no intent to harm corporation, or had no reasonable cause to believe the conduct was illegal.
Does the business judgement rule apply to the duty of loyalty?
No.
What is the test used for usurping a business opportunity.
In determining whether the opportunity is one that must first be offered to the corporation, courts have applied the “interest or expectancy” test or the “line of business” test.
Under the “interest or expectancy” test, the key is whether the corporation has an existing interest or an expectancy arising from an existing right in the opportunity. An expectancy can also exist when the corporation is actively seeking a similar opportunity.
Under the broader “line of business” test, the key is whether the opportunity is within the corporation’s current or prospective line of business. Whether an opportunity satisfies this test frequently turns on how expansively the corporation’s line of business is characterized.
