Ba--Corp. Directors Rights Duties Liabilites

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Statute--General Standards for Directors--§ 33-8-300

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Director shall discharge his duties
1. In good faith
2. with the care exercised by a reasonably prudent person under the circumstances
3. in a manner reasonably believed to be in the best interests of the corporation

In discharging these duties, he is entitled to rely on opinions, reports, etc. prepared/presented by:
1. reliable/competent officers of the corp.
2. lawyers, accountants/experts, etc.
3. competent BOD of which director is not a member

If director has knowledge that contradicts knowledge relied upon, then no good faith

if officer complies with this statute, then not liable for acts/omissions

any action against a director under this section must be commenced within 3 years after the c.o.a. has accrued or within 2 yrs after c.o.a. discovered/should have been discovered--whichever comes first

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Statute--Loans to directors--§ 33-8-320

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a corp. may not loan money [directly or indirectly] or guarantee an obligation of a director UNLESS

loan/guarantee is approved by a majority shareholder vote excluding any shareholder votes held by the director

OR

BOD determines that the loan/guarantee benefits the corp.

even if loan is made in violation of this section; Director is still liable for it

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Statute--Liability for unlawful distributions--§ 33-8-330

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director who votes/assents to a wrongful distribution is liable for the amount that exceeds what could have been lawfully distributed.

Director who commits an unlawful distribution is entitled to contribution from :

any other director who could be held liable AND
any shareholder who accepted the distribution knowing it was unlawful.

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Duty of Care--Business Judgment Rule

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1.) Generally
2.) Extent of Liability
3.) 3.) Defenses to Liability

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(1.) Generally

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(a) Where the act or omission involves no fraud, illegality, or conflict of interest but is a question of policy or business judgment, a Director who acts in good faith is NOT personally liable for mere errors of judgment or want of prudence, short of clear and gross negligence. See Shlensky v. Wrigley
(1) Majority View
(i) Directors have the duty to act honestly and in good faith and with the same degree of diligence, care, and skills that a reasonably (ordinarily) prudent and diligent person would use in similar circumstances. See Francis v. United Jersey Bank

(ii) Where the director does not have sufficient facts to make a judgment, he must make reasonable efforts to inform himself. See Francis v. United Jersey Bank.

(iii) The Business Judgment Rule presumes that, when making business decisions, directors act on an informed basis, in good faith and in the company’s best interests. See Smith v. Van Gorkom (using a gross negligence standard)

a. Exception – Illegality
i. A Director CANNOT invoke the Business Judgment Rule if he causes the corporation to engage in acts that are illegal or contrary to public policy.

(b) Cases
(1) A.P. Smith Mfg. Co. v. Barlow
(i) A corporation MAY make reasonable charitable contributions, even in the absence of express statutory provisions.

(ii) The use of corporate resources for public welfare, humanitarian, educational, or philanthropic purposes is a legitimate end in itself.

(2) Bayer v. Beran
(i) A Director does NOT breech his fiduciary duty by approving a radio advertisement in which the wife of the corporate president, who was also a member of the Board of Directors, was one of the featured performers.

(3) Kamin v. American Express Co.
(i) A complaint alleging that some course of action other than that taken by the board would have been more advantageous does NOT give rise to a cause of action for damages.

(4) Dodge v. Ford Motor Co.
(i) Although a corporation’s Directors have discretion in the means they choose to make products and earn a profit, the Directors may NOT reduce profits or withhold dividends from the corporation’s shareholders in order to benefit the public.

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2.) Extent of Liability

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(a) Injury & Causation
(1) Even where a Director has not exercised the proper measure of care, he will be held personally liable only for corporate losses suffered as the direct and proximate result of his breach of duty.


(b) Acts of Others
(1) A Director is liable for the wrongful acts of other Officers and Directors only if he participated in the wrongful acts, was negligent in failing to discover the misconduct, OR was negligent in appointing the wrongdoer. See Graham v. Allis-Chalmers Manufacturing Co.

(c) Abolishing Liability (§33-2-102(e))
(1) In SC, the Articles of Incorporation MAY limit or eliminate the Directors’ liability for breach of the duty of care, apart from actions in bad faith, intentional misconduct, or knowing violations of the law.

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3.) Defenses to Liability

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(a) Nominal Directors
(1) It is usually no defense that the Director was serving gratuitously or merely as a figurehead. See Francis v. United Jersey Bank

(b) Reliance on Reports of Management
(1) Directors are NOT required to make firsthand investigations of every detail of corporate business. As long as the Director acts in good faith, he is entitled to rely on statements and reports made to him by corporate officers or employees.

(c) Reliance on Expert Opinion
(1) A Director is also entitled to rely on the advice given by attorneys, accountants, engineers, or other persons as to matters the Director reasonably believes to be within the person’s expertise.

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i.) §33-8-310 – Director or Officer Conflict of Interest

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(a) A conflict of interest transaction is a transaction with the corporation in which a director of the corporation has a direct or indirect interest. A conflict of interest transaction is NOT voidable by the corporation solely because of the director's interest in the transaction if any one of the following is true:

(1) the material facts of the transaction and the director's interest were disclosed or known to the board of directors or a committee of the board of directors, and the board of directors or a committee authorized, approved, or ratified the transaction;

(2) the material facts of the transaction and the director's interest were disclosed or known to the shareholders entitled to vote and they authorized, approved, or ratified the transaction; or

(3) the transaction was fair to the corporation.


If (1) or (2) has been accomplished, the burden of proving unfairness of any transaction covered by this section is on the party claiming unfairness. If neither (1) nor (2) has been accomplished, the party seeking to uphold the transaction has the burden of proving fairness.

B.) Cases
i.) Lewis General Tires, Inc. v. Lewis
1.) Facts: ∏s brought a shareholders derivative suit against ∆s, alleging waste.

2.) Rule: A transaction in which a director has an interest, other than as the corporation’s director, is automatically suspect and subject to review.

(a) Such a transaction is voidable unless shown by its proponent to be fair, and reasonable to the corporation.

ii.) Pepper v. Litton
1.) He who is in a fiduciary position CANNOT serve himself first and his cestuis second.

2.) He CANNOT manipulate the affairs of his corporation to their detriment and in disregard of the standards of common decency and honesty.

3.) He CANNOT by the use of the corporate device avail himself of privileges normally permitted outsiders in a race of creditors.

4.) He CANNOT violate rules of fair play by doing indirectly through the corporations.

iii.) Sinclair Oil v. Levien
1.) Facts: Shareholders brought a derivative action against Sinclair Oil to require an accounting for damages sustained by its subsidiary, Sinclair Foreign Oil.

2.) Rule: If, in a transaction involving a parent company and its subsidiary, the parent company controls the transaction and fixes the terms, the transaction MUST meet the intrinsic fairness test.

(a) Intrinsic Fairness Test: The dominant company MUST prove that its transaction with its subsidiary was objectively fair.

(1) The test is invoked only where the parent company is on both sides of the transaction with its subsidiary, and self-dealing is suspected.

(i) Self Dealing: Where the parent company uses its power to enter into a transaction with the subsidiary and the parent company receives a benefit from the subsidiary to the subsidiary’s detriment.

iv.) Zahn v. Transamerica Corp.
1.) Facts: Stockholders of tobacco co. sued ∆ claiming ∆ caused the tobacco co. to redeem its Class A stock at $80.80 per share, instead of allowing them to participate in the liquidation of company assets, in which case they contend they would have received $240 a share.

2.) Rule: If a stockholder who is also a Director is voting as a Director, he represents ALL stockholders in the capacity of a Trustee and CANNOT use the Director’s position for his personal benefit to the stockholder’s detriment.

v.) Cookies Food Products, Inc. v. Lakes Warehouse Distributing, Inc.
1.) Facts: Shareholders sued once it became clear that the Directors were making all the money while not paying out dividends.

2.) Rule: Directors who engage in self-dealing MUST establish that they have acted in good faith, honesty, and fairness.
vi.) In re Wheelabrator Technologies, Inc. Shareholders Litigation
1.) Facts: The shareholders of ∆ sued the company’s directors for breach of fiduciary duty, alleging the proxy statement issued in connection with its merger was misleading.

2.) Rule: An interested transaction between a corporation and its directors is NOT voidable if it approved in good faith by a majority of fully informed, disinterested stockholders.

vii.) Broz v. Cellular Information Systems, Inc.
1.) Facts: Cellular Info Systems filed suit against Broz for breach of fiduciary duty, alleging he put his own interests before that of the corporation.

2.) Rule: A corporate fiduciary agrees to place the interests of the corporation before his or her own in appropriate circumstances.

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Corporate Opportunity Doctrine:

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If a Director is presented with an opportunity which the corporation is financially able to undertake, the opportunity is in the line of the corporation’s business and is of practical advantage to it, the opportunity is one in which the corporation has an interest, and by embracing the opportunity, the self-interest of the Director will be brought into conflict with that of the corporation, the law will NOT permit him to seize the opportunity for himself.

Under the Doctrine of Corporate Opportunity, a corporate fiduciary MUST place the corporation’s interests before his or her own interests in appropriate circumstances, but a corporate fiduciary does NOT breach his or her fiduciary duty by not considering the interests of another corporation proposing to acquire the corporation in deciding to make a corporate purchase.

viii.) Jones v. H.F. Ahmanson & Co.
1.) Rule: Majority shareholders, either singly or acting in concert to accomplish a joint purpose, have a fiduciary responsibility to the minority and to the corporation to use their ability to control the corporation in a fair, just, and equitable manner.

2.) Majority shareholders may NOT use their power to control corporate activities to benefit themselves alone on in a manner detrimental to the minority.

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Corp opportunity Doctrine--what is a corporate opportunity?

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1. If corp. had "tangible expectancy in the sense that it has a specific need, has resolved to acquire it, or has ACTIVELY CONSIDERED its acquisition, may not be taken advantage of by D

2. If opportunity was discovered in his capacity as a D

3. funds, employees, facilities employed

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When the corp is unable to take advantage...

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1.insolvency
-->still must diclose
2. Ultra Vires
--still full disclosure
3. Cor. unwilling to take advantage after D fully informs them

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Corp opportunity Doctrine--remedies

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1. Constructive Trust--if D has the opportunity, courts can force a conveyance
2. Damages--when the D has resold the biz or property

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Breach of Loyalty--conflict of interest--remedies

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D's unfair profit

plus any salary earned during period of fiduciary breach
and in some cases punitive damages

when no bad faith or personal profit, recission

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Corp opportunity doctrine--∆'s

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ARIA
Abandonment--corp abandoned the opportunity
Rejection--corp rejected the opportunity
Approval--corp explicitly approved the fiduciary's taking the opporuntiy

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Controlling Shareholders Fiduciary Duties--

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can use influence to produce personal gain that in turn unfairly prejudices corp or minority shareholders
--no sale of control
--dealings with corp other than sale of control
Can sell shares for any price unless--
FOOL
Fraud of improper nondisclosure
Looting--reason to know buyer will harm the corp.
Office--transfer control of board with sale of uncontrolling block of stock
Purchase represents a collective opportunity--controller talks buyer into buying from him instead of corp.