Directors' Duty of Loyalty
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Created by:
CougarAbogado on December 15, 2010
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12 terms
Terms | Definitions |
|---|---|
 Internal Controls | *Directors must ensure there are adequate internal controls to educate on the law and deter wrong doing *Board decides whether controls are adequate, under BJR *Ct. will get involved only when there's a sustained/systematic failure of board to exercise oversight *If board simply ignores system, that could be grounds for loyalty claims *Compliance systems help a lot in federal sentencing guidelines (mitigating factor) |
| Good Faith Breaches | *Intentionally acting against corp.'s best interests *Intentionally acting to violate law *Conscious disregard of duty *Much worse than gross negligence: I intend harm or intentionally disregard duty *Therefore, Ps must show sustained/systematic failure (= intent) |
| Good Faith/Duty of Loyalty | *Good faith falls under duty of loyalty |
| Risk Management Claim Cases | *Vast majority tossed b/c they're simply post-hoc judgments *Bad outcome ~= bad faith *Cts. very reluctant to second guess internal controls, even more so w/risk management |
| Self-interested Transactions | *Ct. will review and set aside if unfair (used to be automatically void) |
| Interested v. Independent | *Different *Interested = personal interest in transaction separate from SHs *Dependent = tied to person or corp. *Cts. give directors presumption that they're acting in corp.'s best interest |
| Setting aside BJR | *If BJR's overcome, case goes forward on the merits (far from over and done) *If self-interested, directors have the burden to show transaction fair/intrinsically fair *Directors had better show a semblance of arm's length transaction - get a better/multiple valuation/fairness opinion |
| Showing Fairness | *Procedure, paperwork, fairness opinion, indep. disinterested directors, minutes set out the reasons why K is in best interests of corp., etc. |
| Overcoming Self-Dealing in OH | *SD ~voidable if: a) Disclosure to the board who, in GF reason. justified by facts, can approve if a majority of disint. directors approve trans., even if disint. directors<quorum OR b) Disint. SHs give specific approval at meeting held for that purpose, w/relevant info, given advance notice; OR c) K fair when entered into |
| Overcoming Self-Dealing in DEL. | *Once D shows all sanitizing procedure of disclosure, etc., the burden shifts to P to show unfair transaction |
| Corp. Opportunity Doctrine | *There is opportunity that could benefit corp. and D takes it *D AT LEAST must disclose *Once disclosure, we want to see other directors use info to make informed decision, as well as disinterested/independent *Using corp. resources to discover/sift out opportunity definitely implicates the doctrine |
| Line of Business Test | *Was the opportunity D took in corp.'s line of business? *Highly factual *Candy store/Pepsi stock case |
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