Business Associations

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Director's Conflicting Interest Transaction §8.60(1)

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transaction effected or proposed to be effected by the corporation: (1) to which the director is a party; OR (2) the director had knowledge and a material financial interest known to the director; OR (3) the director knew that a related person was a party or had a material financial interest

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"Related Person" 8.60(5)

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(1) director's spouse; (2) child, grandchild, parent, grandparent, aunt, uncle, etc.; (3) an individual living in the same house as the director; (4) a business of which the director is a director, unincorporated entity of which the director is a general partner or a member of the governing body

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Incorporation §2.03

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the corporate existence begins when the articles of incorporation are filed

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Liability for preincorporation transactions §2.04

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all person purporting to act as or on behalf of a corporation, knowing there was no incorporation under this Act, are jointly and severally liable for all liabilities created while so acting

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Business Judgment Rule

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a judicial presumption that the directors have acted in accordance with their fiduciary duties of care, loyalty and good faith
There is a rebuttable presumption that directors are better equipped than the courts to make business judgments and that the directors acted without self-dealing or personal interest and exercised reasonable diligence and acted with good faith

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ALI Definition of a Corporate Opportunity

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• (1) Any opportunity to engage in a business activity of which a director or senior executive becomes aware, either:
• (A) In connection with the performance of functions as a director or senior executive, or under circumstances that should reasonably lead the director or senior executive to believe that the person offering the opportunity expects it to be offered to the corporation; or
• (B) Through the use of corporate information or property, if the resulting opportunity is one that the director or senior executive should reasonably be expected to believe would be of interest to the corporation; or
• (2) Any opportunity to engage in a business activity of which a senior executive becomes aware and knows is closely related to a business in which the corporation is engaged or expects to engage.

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ALI General Rule

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A director or senior executive may not take advantage of a corporate opportunity unless:
• (1) The director or senior executive first offers the corporate opportunity to the corporation and makes disclosure concerning the conflict of interest and the corporate opportunity;
• (2) The corporate opportunity is rejected by the corporation; and
• (3) Either:
• (A) The rejection of the opportunity is fair to the corporation;
• (B) The opportunity is rejected in advanced by disinterested directors, or, in the case of a senior executive who is not a director, by a disinterested superior, in a manner that satisfies the standards of the business judgment rule; or
• (C) The rejection is authorized in advance or ratified, following such disclosure, by disinterested shareholders, and the rejection is not equivalent to a waste of corporate assets.

Front 8

Statutory Exculpation Provisions
• MBCA §2.02(b)(4)
• DE G.C.L. §102(b)(7)

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• A breach of the duty of care claim must be dismissed where a corporation has an exculpatory provision in its charter that precludes money damages for directors’ breaches of the duty of care (Malpiede v. Townson)
o The purpose of 102(b)(7) was to permit the stockholders to adopt a provision in the certificate of incorporation to free directors of liability in damages for due care violations, but not duty of loyalty violations, bad faith claims and certain other conduct.

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Aronson v. Lewis

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• In determining demand futility the court in the proper exercise of its discretion must decide whether, under the particularized facts alleged, a reasonable doubt is created that: (1) the directors are disinterested and independent and (or) (2) the challenged transaction was otherwise the product of a valid exercise of business judgment (duty of care)

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Fiduciary Duty; Duty of Care; Duty of Loyalty;

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• Breach of Fiduciary Duty: the failure of a fiduciary to observe the standard of care exercised by professionals of similar education and experience
• Duty of Care: duty that an officer or director owes to the corporation, by virtue of his fiduciary relationship, to act for the benefit of the corporation
• Duty of Loyalty: a director’s duty to refrain from self-dealing or to take a position that is adverse to the corporation’s best interest.