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21 Cards in this Set
- Front
- Back
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Duty of Loyalty
Self-interested transaction = |
A transaction where an officer, director, or controlling SH and the corp are on opposite sides of the transaction
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Duty of Loyalty
(Self-interested transaction) A director, officer or controlling SH who enters into a contract with the corp is under a duty |
Disclose all relevant facts
Transactions between a corp and an entity in which its directors are interested may be set aside unless the proponent of the contract shall establish affirmatively that the contract or transaction was fair and reasonable as to the corp at the time it was approved by the board |
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Duty of Loyalty
(Self-interested transaction) Transactions btw corp & an entity in which directors are interested may be set aside unless the proponent of the K establishes affirmatively that the contract / transaction was |
fair and reasonable as to the corp at the time it was approved by the board
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Duty of Loyalty
(Self-interested transaction) Entire Fairness Test - Interested directors have the burden of proving the transaction was |
fair and reasonable to the corp, look at:
i.)Fair Price – vs other comparable arms length transactions ii.)Fair Dealings – how transaction went down |
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Duty of Loyalty
(Self-interested transaction) Remedies - the usual remedy for a breach of loyalty is |
1)rescission of the self-interested transaction (not as much money, but an easier standard to prove)
2)Sometimes courts also award supplementary remedies, e.g., repayment of salary, punitive damages for fraud, or attorneys fees |
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Duty of Loyalty
(Self-interested transaction) Statutory Approaches - Even though most statues provide that a self-dealing transaction isn’t voidable so long as either the informed directors or SH’s approve or ratify it... |
Courts have interpreted such statues narrowly and imposed a good faith and fairness requirement even when the SH’s or directors have approved the transaction
Transaction mustn’t only be fair in price, but must also be fair to the corp’s interests |
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Duty of Loyalty
(Self-interested transaction) Shareholder Ratification |
An informed & disinterested SH ratif of a self-inter transact protects it from judicial review, except cases of waste
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Duty of Loyalty
(Self-interested transaction) Shareholder Ratification is ineffectual if |
1.)A majority of those affirming the transaction had a conflicting interest with respect to it, or
2.)If the transaction that is ratified constituted corp waste |
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Duty of Loyalty
(Self-interested transaction) Corporate Waste = |
= exchange of corp assets for consideration so disproport that no reas. person would trade
But if a good faith judgment exists under the circumstances that transaction = worthwhile, no finding of waste, even if subseq invest makes transaction seem unreas. SH’s may not ratify waste except by a unanimous vote |
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Duty of Loyalty
(Self-interested transaction) Corporate Opportunity Doctrine = |
Corp officer/director, presented w/business opport that
1)corp financially able to undertake, & 2)in line corp’s business & of practical advantage to it, 3)is one of which the corp has an interest or a reasonable expectancy AND, 4)by embracing the opportunity, interest of D&O conflicts w/corp the law will not permit D&O to seize the opport for himself |
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Duty of Loyalty
(Self-interested transaction) Corporate Opportunity Doctrine, ALI Test = |
An officer/director may not take advantage of a corp opportunity unless:
1.)First makes disclosure of conflict of interest; 2.)Offers opportunity to corp, and 3.)Corp rejects opportunity In addition, the rejection must be either 1.)Fair, oir 2.)In advance by disinterested directors/superiors, or 3.)Authorized in advance, or 4.)Ratified by disinterested SH’s, and no waste |
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Duty of Loyalty
(Self-interested transaction) Corporate Opportunity Doctrine - There is corporate opportunity if |
D&O became aware in connection w/duties, through corp information on property, or closely related to corp’s resent or planned business
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Duties of Controlling Shareholders
Parents Dealing With Their Subsidiaries - When a parent deals with a subsidiary in a transaction that involves self-dealing |
(i.e. parent receives from subsidiary to detriment to, minority SH’s of subsidiary), the intrinsic fairness applies
The burden of proof on parent to prove transaction was intrinsically fair to the subsidiary |
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Duties of Controlling Shareholders
Proportional Dividend Payments to Minority SH’s A dividend payment that is paid proportionately to minority SH’s does not |
involve self-dealing and is therefore, subject only to the BJR, not intrinsic fairness (upheld unless improper motives and amounted)
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Duties of Controlling Shareholders
Disclosure of Facts Regarding Transactions |
controlling SH doesn’t have to disclose fully all material facts surrounding transaction
Omitted fact is material if = substantial likelihood that, omitted fact was factored in the deliberations of the reasonable SH A controlling SH doesn’t have to disclose information to committee for arms-length negotiation which normally not disclosed in such a negotiation |
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Duties of Controlling Shareholders
(Shifting Burden to Plaintiffs by Using an Independent Committee) |
The burden may be shifted to Plaintiff in a case involving self-dealing by a controlling SH (entire fairness standard) through the use of a well functioning committee of independent directors
The committee must function in a manner that indicates that the controlling SH didn’t dictate the terms of the transaction and that the committee exercised real bargaining power at an arms-length |
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Duties of Controlling Shareholders
(Duty - Equal Benefits for SH’s) |
1. Majority SH’s may not use power to control corp activits to benefit them alone or manner detrim to minority
2. Any use of the corp or their power to control corp must benefit all SH’s proportionately and must not conflict with the proper conduct of the corp’s business 3. Any transaction where control of the corp is material, the rule of good faith and inherent fairness to the minority governs controlling SH’s |
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Duties of Controlling Shareholders
(Sale of Control) Shareholder’s Right to Sell Controlling Interest at a Premium Price |
Absent looting of corp assets, conversion of a corp opportunity, fraud, or other acts of bad faith, a controlling SH is free to sell, and a purchaser is free to buy, that controlling interest at a premium price
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Duties of Controlling Shareholders
(Sale of Control) Duty to Make Reasonable Inquires Before Sales |
When circumstances would alert a reasonably prudent person to a risk that the buyer is dishonest or in some material respect not truthful, a duty devolves upon the seller to make such inquiry as a reasonably prudent person would make, and generally to exercise care so that others who will be affected by her actions should not be injured by wrongful conduct
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Duties of Controlling Shareholders
(Sale of Control) Exception – Can’t Deprive Corp of a Business Opportunity |
Controlling SH’s may not sell control in such a manner that deprives the corp of a business opportunity
In a time of market shortage, where a call on a corp’s product commands an unusually large premium, a fiduciary may not appropriate to herself the value of the premium |
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Duties of Controlling Shareholders
(Sale of Control) Ban Against Selling Corp Office or Management of Control |
1. It is illegal to sell corp office or management of control by itself
2. It is questionable as to whether it is legal to transfer control as part of a sale of less than a majority of a corp’s stock |
