Pg 34 Flashcards
What is the requirement of independence with regard to the business judgement rule?
Directors and officers must exercise business judgements freely, without control or dominion of anyone else. Ie: it’s not OK to vote a certain way because you are afraid of reprisals from the CEO.
What is involved in the element of the business judgement rule that says decisions must be made with due care?
This assumes all of the duty of due care elements are incorporated.
What does it mean for the business judgement rule and the duty of due care that requires that decisions must be made with adequately informed judgment?
Directors have to act on an informed basis. The board has to make every reasonable effort to become informed about all material information before they reach a business decision. This includes any information that is relevant, important, and necessary for adequate understanding of the issue being considered.
What is the standard that would not satisfy the business judgement rule of due care?
Gross negligence. Directors don’t have to investigate every possible source of information - they can rely on the corporation’s records, financial statements, reports, statements of executive opinions, and other employees if reliance is reasonable. They can also rely on the opinion of experts.
If a board of directors made a decision about something after hearing an oral report, does that satisfy due care?
No
If someone got a seat on a board of directors but then did nothing to act on it, what happens?
They would be held accountable for the board’s actions because they had a duty to monitor the business and to inform themselves about it, to attend meetings, read financial statements, and ask questions when irregularities come up. They must also duly deliberate as a body
The business judgement rule applies to both directors and officers, but how does the duty of care portion of that apply?
That only applies to directors, so the business judgement rule presumption can be rebutted for officers by showing that the officer breached a duty of loyalty.
What is involved in preemption or preemptive rights?
This lets a shareholder buy a proportionate number of additional shares of the corporation before sales are made available for purchase by the general public in a secondary offer.
What is the rationale behind preemptive rights for shareholders?
Is meant to protect against the delusion of the shareholder’s equity in a corporation so they can keep their proportion and vote in control
Are preemptive rights mandatory?
No, they are optional and must always be express
What type of stock do preemptive rights apply to?
Only common stock
What are the different approaches to whether or not preemptive rights apply?
– Majority: opt out. Preemptive rights are automatic unless the articles of incorporation says they are not.
– MBCA: opt in. You must call for preemptive rights in the articles of incorporation in order for them to apply.
Preemptive rights only let a shareholder keep a proportionate share, and not do what?
He cannot increase his share
If a shareholder is offered preemptive rights, must he buy them?
No, he has the right to buy, but the corporation cannot force him to.
What is the one time that preemptive rights are not triggered?
If shares are being used as:
- consideration for property, purchases, or services
- to discharge a bona fide debt
- for a merger
- for employee stock options and purchase plans.
I.e.: if the corporation buys land for a new building and pays for it by issuing stock to the seller, that doesn’t trigger a preemptive right for existing shareholders.
