BUSINESS ENTITIES OUTLINE
FIDUCIARY DUTIES: 2 different analyses
▪ 1) Nature of Breach
• A) Duty of loyalty: The duty of loyalty mandates that the best interest of the corporation and its shareholders takes precedence over any interest possessed by a director, officer, or controlling shareholder o i) Self-Dealing: Any time a corporation is in a transaction where a director, officer, or majority shareholder is on the other side, and the corporation is exchanging too much for what it is receiving; such a transaction is not invalid unless unfair to the corporation at the time of the transaction (Tomaino) o ii) Usurpation of Corporate Opportunity: When a director or officer takes a business deal for herself when the corporation would have accepted it. 3 Tests/Elements for Corporate Opportunity: • 1) Line of business test
• Actor knows the opportunity is a business activity closely related to a business in which the corporation is engaged or expects to engage. • 2) Expectancy test
• Whether offeror expects opportunity will be offered to the corporation or whether a corporation would expect to have an interest in opportunity. This is a narrower test than the line of business test and uses the reasonableness standard. • 3) Financial capacity of corporation • Not whether a corporation would have taken opportunity, but if it could have taken it. A large company has many types of ways to get capital if it wants to, so unless it’s on the verge of bankruptcy, they have a good argument that it could have had the capacity • If the opportunity meets all of these elements/tests, then there is an implied requirement that the director/officer disclose the opportunity to the board • Can cleanse the usurpation by having a majority of disinterested directors/shares vote in favor of it o iii) Good Faith: A director cannot act loyally towards the corporation unless she acts in the good faith belief that her actions are in the corporation's best interest; cannot be the only basis of a duty of loyalty claim. Examples of acting without good faith (Stone): ▪ Where the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation ▪ Where the fiduciary acts with the intent to violate applicable positive law ▪ Where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties. • In order to establish director oversight liability (Stone): (a) the directors utterly failed to implement any reporting or information system or controls; or (b) having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention (both require a showing that the directors knew that they were not discharging their duties • Adopted from Caremark, this means that to establish oversight liability, there must be a systematic failure of the board to exercise oversight duties (tough standard for plaintiffs to show) • B) Duty of Care: 1) director act in good faith, 2) in manner he reasonably believes to be in the best interests of the corporation, and 3) with such care as a ordinarily prudent person in a like position would use under similar circumstances (Crown); it is the duty of the directors of a company is to act on an informed basis, meaning all material information that is reasonably available to them; usually a unitary standard, but court may impose a higher standard for those that have specialized skills/knowledge...
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