Tension in the Capital Structure

Question 1

The board of directors ( does / does not) breach its duty, in exercising its business judgment, to prefer the interests of ______ stockholders to the interests of _________ stockholders, if there is conflict of the two interests.

Answer 1

The board of directors DOES NOT breach its duty, in exercising its business judgment, to prefer the interests of COMMON stockholders to the interests of PREFERRED stockholders, if there is conflict of the two interests.

Question 2

Does the board of directors breach its duty, in exercising its business judgment, to prefer the interests of common stockholders to the interests of preferred stockholders, if there is a conflict of the two interests?

Answer 2

No. Directors owe duties to both the common stockholders and the preferred stockholders. The duties owed to the preferred stockholders are “contractual in nature.” However, the board of directors does not breach its duty, in exercising its business judgment, to prefer the interests of common stockholders to the interests of preferred stockholders, if there is a conflict of the two interests.