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27 Cards in this Set
- Front
- Back
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Director and Officer Duties (Umbrella Rule) |
Directors and officers of a corporation owe the corporation duties of care and loyalty. |
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Duty of Care |
The duty of care requires that the director act: (1) in good faith (2) with the care of an ordinarily prudent person in a like position under similar circumstances, and (3) in a manner he reasonably believes to be in the best interest of the corporation. BURDEN is on Plaintiff. |
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Good Faith |
At a minimum, good faith requires the director to be honest in their conduct, with shareholders, and with each other. |
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Ordinarily Prudent Person |
(1) "Investigate" "Inspect" "Research" (2) CAN rely on employees/accountants/lawyers so long as director reasonably believes they are capable and merits confidence. |
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Business Judgment Rule |
Under the Business Judgment Rule, directors who meet their burden of care will not be liable for decisions that, in hindsight, turn out to be erroneous. |
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only liable if breach results in a loss to the corporation |
loss |
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Duty of Loyalty |
A director owes a duty of loyalty to the corporation. The director must act in good faith and with a reasonable belief that they are acting in the corporation's best interest. BURDEN is on Defendant |
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Conflict of Interest |
A director has a conflict of interest if he knows that he or or a related person is: (1) a party to the transaction; (2) has a beneficial financial interest in the transaction; (3) is an employee/partner of the entity in which the corporation is transacting with, AND the transaction is of such importance that it would normally need board approval. Analyze whether there is a conflict of interest |
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When may conflict not be enjoined or result in damages |
A transaction with a potential conflict of interest will not be enjoined or result in damages if: (1) the director discloses his interest, and (2) all the relevant facts of the transaction; AND - transaction is approved by a majority of disinterested board of directors - transaction is approved by a majority of disinterested shareholders; OR - transaction is fair to the corporation. |
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Directors can set their own compensation so long as ... |
it is REASONABLE and made in GOOD FAITH |
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Usurpation of Corporate Opportunity |
(1) If the corporation has an interest or expectancy in the opportunity, then the director shall not take that opportunity for himself, unless: (a) director first presents the opportunity to the corporation, and (b) the corporation decides not to act. (2) the closer the opportunity is to the corporation's line of business, the more likely it is a corporate opportunity. |
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Remedy for breach of usurpation of corporate opportunity |
Corporation can: (1) recover profits made by director; (2) force director to convey opportunity to the corporation for same consideration that director paid. |
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Common Law Duty of Loyalty |
In addition to the federal securities law, a director has a common law duty to shareholders to not engage in insider trading. |
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Defenses |
Director is allowed to rely in good faith on information presented by an officer, employee, accountant, reasonably believed competent. |
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Remember: Breach of Implied Warranty of Authority |
Directors and Officers may be in breach if they exceed their authority - breach of implied warranty of authority |
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Indemnification of Directors |
Director can be indemnified if: (1) Prohibited Indemnification: if director is held liable (2) Mandatory Indemnification: if officer is successful in defending suit "ON THE MERITS" (3) Permissive Indemnification: if case reaches settlement |
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Then discuss: |
Articles of Incorporation can exculpate director for breach of duty of care, but not breach of duty of loyalty. |
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Promoter |
(1) A promoter is a person acting on behalf of a corporation not yet formed. (2) If a promoter acts on behalf of the corporation and enters into a pre-incorporated contract with a third party, the promoter will be held jointly and severally liable for any liabilities, even AFTER formation, unless the third party enters a novation between the corporation that expressly relieves the promoter from all liability. (3) Generally, a corporation is NOT liable on pre-incorporation contract, unless the corporation has adopted the contract. |
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Promoter's Duty to Corporation |
(1) A promoter owes a fiduciary duty to the corporation and its shareholders, and thus must act in good faith. (2) A promoter who profits off either: - the sale of land to the corporation; OR - by personally purchasing stock of the corporation; May be liable for the profit OR forced to rescind the sale, UNLESS the promoter has disclosed all the material facts of the transaction to either: - a disinterested board of directors; OR - all shareholders - both current and prospective. |
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Piercing the Corporate Veil |
(1) Generally, owners (shareholders) of a corporation are not personally liable for the debts and obligations of the corporation. (2) However, one can seek judgment to hold the owner (shareholder) personally liable by piercing the corporate veil. (3) There are three theories to justify piercing the corporate veil: (i) the corporation is an alter ego of individuals - this requires a showing that the corporation fails to observe corporate formalities (keep adequate records, books, minutes), and a basic injustice so that equity would require that the shareholder be held personally liable for the damage caused; (ii) inadequate capitalization at the time of incorporation; (iii) avoidance of existing obligations at the time of incorporation, or fraud on creditors or third persons. Courts are very unlikely to pierce the corporate veil -- more likely for tort P b/c tort did not voluntarily transact with corporation, nor assume the risk. |
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Rule 10b-5 Insider Trading |
(1) A person commits insider trading if they purchase or sell securities with knowledge of material, nonpublic information; and (2) by doing so, breach a duty of trust and confidence owed to: - the issuer - the shareholders of the issuer - another person who is the source of the nonpublic information. (3) There are four types of liable persons: (1) insider; (2) tipper; (3) tippee; (4) misappropriator. |
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Insider |
- An insider is a person who is somehow connected to the issuer of the stock - shareholder, director, attorney, employee, etc. - An insider is liable for insider trading if they use or disclose the nonpublic information for their personal benefit. MUST PERSONALLY BUY OR SELL STOCK |
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Tipper |
- When an insider gives a tip of inside information to someone else who then trades with that information, they are a tipper. - A tipper is liable if the tip was made for any improper purpose. |
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Tippee |
- A tippee is a person who trades based on information from an insider. - A tippee is liable if the tipper breached a duty of nondisclosure, and the tippee knows the tippper was breaching their duty of nondisclosure. |
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Misappropriator |
- A misappropriator is a person who trades in breach of a duty of confidence owed to the source of the non-public information. - A misappropriator may be criminally prosecuted. |
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Damages |
(1) disgorge of profits (2) individual plaintiffs who bought or sold may sue for: - rescission - damages |
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Section 16(b) - Short Swing Sales |
- Any profits realized - by a shareholder of more than 10% of the stock OR by a director or officer - from the purchase or sale of their corporation's stock - within a period of less than six months, - must be disgorged to the corporation. Profit = measured by the difference between the transaction with the highest sales price and the transaction with the lowest purchase price within a six month period. |
