De - Corporations

Front 1

Directors of DE Corp. owe a fiduciary dute to who:

Back 1

Corporation and SH

Front 2

Fiduciary duties

Back 2

Due Care
Loyalty
Good faith

Front 3

Good Faith

Back 3

Now subsumed "subsidiary element" of duty of loyalty

Front 4

Duty of Care applicability

Back 4

1. Duty to exercise care in the decision making process. i.e. - on an informed basis
2. Duty to exercise care in all other respects, i.e., - delegation and oversight

Front 5

Duty of Care director liability standard

Back 5

based on gross negligence
-directors must consider all material information reasonably available

Front 6

Before making a decision, directors are expected to:

Back 6

Directors are expected to be reasonably knowledgeable about Corp's business and obtain credible information

Front 7

Director will not be penalized for honest mistake of judgment if:

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they acted with good faith and after reasonable investigation and if judgment appears reasonable at the time the decision was made

Front 8

When are directors are fully protected

Back 8

when they rely in good faith upon the records of Corporation and upon such information,opinions,reports, or statements presented to Corp. by any of Corp's officers or employee, or committees of Board, or by other experts or professionals selected with reasonable care.

Front 9

When is a report qualified for this purpose?

Back 9

When the presentation is pertinent to the subject matter and must be entitled to good faith, not blind reliance

Front 10

Concerning the presentations, directors are duty bound to do what?

Back 10

To make reasonable inquiries to ascertain inadequacies of the presentation

Front 11

Examples of Breach of duty of care

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a. haste in decision making
b. lack of preparation
c. lack of questioning
d. lack of involvement
e. lack of meaningful record
f. lack of care in dealing with, reviewing, and understanding relevant documents
g. failure to implement a corp. information and reporting system such that the board would be able to reach informed judgements concerning both Corp's compliance with law and its business performance may also result in a breach of the duty of care.
h. failure to attend board meetings consistently

Front 12

Violation of duty of care - presumption of BJR overcome

Back 12

if SH establishes that the directors violated their duty of care, the presumption that they were exercising business judgement is overcome and SH has established a prima facie case of liability, placing on the director Ds the burden of showing that the transaction was ENTIRELY FAIR to Corp. and SH

Front 13

102b7 Defense

Back 13

If claim involves a BREACH OF DUTY OF CARE, director may assert limitation of liability defense if 102b7 provision is in COI. - this is an affirmative defense

Front 14

Avoiding 102b7 Defense

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to avoid the effects of a 102b7 provision, SH has the obligation to plead facts in his or her complaint that, if true, implicates breaches of duty of loyalty or good faith

Front 15

DUTY OF LOYALTY - applicability

Back 15

A director's duty of loyalty is implicated where he or she has a SUBSTANTIAL SELF- INTEREST WHICH IS NOT CONSISTENT WITH THE INTERESTS OF CORP.

Front 16

DUTY of LOYALTY standard

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requires that self-dealing transactions be ENTIRELY FAIR to Corp.

Front 17

Examples of Interested Transactions

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Compensation - can fix own compensation - must be reasonable

Front 18

Examples - loyalty

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i) one who controls Corp. may not exercise that control to the detriment of Corp. or minority SH

Front 19

loyalty example - cash out merger

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controlling SH bears burden of proving its entire fairness, and while approval such transaction by independent committee of directors or informed majority of minority SH shifts the burden on the issue of fairness to the challenging party.

Front 20

loyalty - parent corp. causes its subsidiary to loan money

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parent corp. that causes its subsidiary to loan money to the parent must show that the terms of the loan were entirely fair to the subsidiary.

Front 21

loyalty - controlling SH causes Corp. to purchase an asset from another Corp. also controlled by SH

Back 21

entire fairness standard applies

Front 22

Corporate Opportunities

Back 22

Director, officer, or control SH may not take for himself or itself business opportunities which rightfully belong to Corp.

Front 23

An opportunity belongs to the Corp. if:

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#1 - corp. is financially able to take advantage of opportunity
#2 - opportunity is within corp's line of business
#3 - corp. has an interest or reasonable expectation in the opportunity; AND
#4 - if fiduciary took for his own would be in position adverse to duties owed to Corp.

Front 24

Fiduciary may take opportunity if:

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#1 - presented in individual capacity
#2 - opportunity not essential to Corp.
#3 - Corp. holds no interest or expectancy in opportunity; AND
#4 - director has not wrongfully employed corporate resources for opportunity

Front 25

Safe Harbor - Presentment

Back 25

if fiduciary is unsure as to whether corp. opportunity can be taken, the fiduciary can PRESENT the opportunity to the Board for acceptance or rejection

Front 26

DUTY of LOYALTY standard

Back 26

requires that self-dealing transactions be ENTIRELY FAIR to Corp.

Front 27

Examples of Interested Transactions

Back 27

Compensation - can fix own compensation - must be reasonable

Front 28

Examples - loyalty

Back 28

i) one who controls Corp. may not exercise that control to the detriment of Corp. or minority SH

Front 29

loyalty example - cash out merger

Back 29

controlling SH bears burden of proving its entire fairness, and while approval such transaction by independent committee of directors or informed majority of minority SH shifts the burden on the issue of fairness to the challenging party.

Front 30

loyalty - parent corp. causes its subsidiary to loan money

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parent corp. that causes its subsidiary to loan money to the parent must show that the terms of the loan were entirely fair to the subsidiary.

Front 31

loyalty - controlling SH causes Corp. to purchase an asset from another Corp. also controlled by SH

Back 31

entire fairness standard applies

Front 32

Corporate Opportunities

Back 32

Director, officer, or control SH may not take for himself or itself business opportunities which rightfully belong to Corp.

Front 33

An opportunity belongs to the Corp. if:

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#1 - corp. is financially able to take advantage of opportunity
#2 - opportunity is within corp's line of business
#3 - corp. has an interest or reasonable expectation in the opportunity; AND
#4 - if fiduciary took for his own would be in position adverse to duties owed to Corp.

Front 34

Fiduciary may take opportunity if:

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#1 - presented in individual capacity
#2 - opportunity not essential to Corp.
#3 - Corp. holds no interest or expectancy in opportunity; AND
#4 - director has not wrongfully employed corporate resources for opportunity

Front 35

Safe Harbor - Presentment

Back 35

if fiduciary is unsure as to whether corp. opportunity can be taken, the fiduciary can PRESENT the opportunity to the Board for acceptance or rejection

Front 36

Power to Renounce

Back 36

Board can renounce in advance in COI or by action of Board in specified business opportunity or classes

Front 37

Safe Harbor Statute

Back 37

Interested transactions valid if:
#1 - approved by majority of fully informed disinterested directors
#2 - approved by majority of fully informed disinterested SHs; OR
#3 - transaction is entirely fair to Corp.

Front 38

compliance with safe harbor statute -relationship with BJR

Back 38

compliance with safe harbor statute does not restore the board the presumption of BJR, rather it shifts burden to P to prove transaction was not entirely fair

Front 39

DUTY OF GOOD FAITH

Back 39

1. requires a director to act at all times with an honesty of purpose and in the best interests and welfare of Corp.
2. this duty is subsumed to duty of Loyalty

Front 40

What rises to level of bad faith

Back 40

i. subjective bad faith - conduct motivated to harm
ii. where the Directors fail to act in the face of a known duty to act thereby demonstrating a conscious disregard for their responsibilties

Front 41

DUTY OF DISCLOSURE/CANDOR

Back 41

This is not a separate duty - it flows from the triad

Directors owe SH duty of disclosure based on materiality standard

Front 42

DUTY OF DISCLOSURE/CANDOR Standard

Back 42

Directors must disclose fully and fairly ALL MATERIAL INFORMATION within the Board's control when it seeks a SH action

Front 43

Material Information

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information a reasonable SH would consider important in deciding how to vote or act in transaction

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Limitations on concept of materiality - information that need not be disclosed

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i. conclusions
ii. inferences and speculation
iii. common knowledge
iv. not required to engage in self-flagellation or speculate about improper motives
v. merger negotiation until price and structure and agreed upon
vi. soft information. (depends on reliability of information)
vii. detailed facts and modes of analysis by a financial advisor in developing an opinion as to fairness of the value of a transaction

Front 45

What must P show to prevail on a disclosure claim?

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a substantial likelihood that the omitted fact would have assumed ACTUAL SIGNIFICANCE in the deliberations of a reasonable SH.

Front 46

Directors must be honest

Back 46

-public statements made to the market
-statements about the corp. to SH with the request for SH action
-statements to SH in connection with a proposed SH action

Front 47

Scope of fiduciary duties

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1. Directors, officers, majority SH, and controlling SH owe fiduciary duties to corp. and is SH
2. not owed to convertible debt. or warrant holders
3. owed to creditors when the company is in the vicinity of insolvency or is insolvent

Front 48

Business Judgment Rule

Back 48

an extension of the duties of due care, loyalty, and good faith.
- the rule operates to preclude a court from imposing itself unreasonably on the business and affairs of corp. - it is both a procedural and substantive rule.

Front 49

BJR - procedural

Back 49

rule is a PRESUMPTION that in making business decisions the directors acted on an informed basis, in good faith, and in the honest belief that the action was taken in the best interest of Corp.

Front 50

BJR - substantive

Back 50

when BJR applies, there is NO LIABILITY to directors for injury or loss to Corp. from actions in good faith with proper care.

Front 51

P can defeat the presumption created by BJR if P can show that the majority of directors who approved the transaction were:

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#1 - self-interested
#2 - were under domination or control of interested persons
#3 - were not fully informed
#4 - did not act in good faith

Front 52

What then happens once BJR presumption is defeated?

Back 52

burden then shifts to defendant directors to show that transaction was ENTIRELY FAIR

Front 53

ENTIRE FAIRNESS

Back 53

requires a showing of both FAIR PRICE and FAIR DEALING

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Fair Price

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Relates to the economic and financial considerations of the proposed transactions, including all relevant factors

Front 55

Fair Dealing

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Includes fairness as to when the transaction was timed, structured, negotiated, disclosed, and how the approvals of the directors and SH were obtained.

Front 56

ENTIRE FAIRNESS - Burden of Proof in general

Back 56

Burden is on self-interested fiduciary to prove entire fairness

Front 57

Exceptions to EF (Shifting burden)

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If a self-interested transaction involving a controlling SH was approved by a DILIGENT COMMITTEE OF DISINTERESTED AND INDEPENDENT DIRECTORS, the burden is on P to show the transaction was NOT entirely fair
-if a self-interested transaction involving a controlling SH was approved by a WELL INFORMED MAJORITY, the burden is on P to show that the transaction was NOT entirely fair

Front 58

Enhanced Scrutiny (BJR in Control Shifting Transactions)

Back 58

actions taken by directors that involve a change in the corporate control of Corp. are subject to BJR. These transactions can be either proactive or reactive. In such circumstances, the courts apply an ENHANCED SCRUTINY to the transaction PRIOR to the application of BJR