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Business Organizations 2010-2011 Lectures. Partnerships, Corporations And the variants PROF. BRUCE MCCANN SPRING SEMESTER Lecture 2 Duty of LOYALTY. The Emerging Duty of Good Faith. Walt Disney: - PowerPoint PPT Presentation
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PARTNERSHIPS,CORPORATIONS
AND THE VARIANTS
PROF. BRUCE MCCANN
SPRING SEMESTER LECTURE 2DUTY OF LOYALTY
Business Organizations2010-2011 Lectures
The Emerging Duty of Good Faith
Lec. 2 Sem 2, pp 600-631 Corps Prof. McCann
Walt Disney: The decision of the compensation committee will be
sheltered by the BJR if they acted with due care (i.e., were not grossly negligent) and if they were not acting in BAD FAITH.
BAD FAITH can be Subjective: motivated by an actual intent to do harm, or Unintentional but grossly negligent
QUESTION: If the board is grossly negligent for duty of care purposes, are they then automatically acting in bad faith?
ANSWER: No, gross negligence alone does not constitute bad faith. (Otherwise, exculpation statutes meaningless.)
What is Bad Faith for Purposes of Liability?
Lec. 2 Sem 2, pp 600-631 Corps Prof. McCann
Intentional dereliction of duty or a conscious disregard for one’s responsibilities
Deliberate inattention and inaction in the face of a duty to act.
A Taste of Waste
Lec. 2 Sem 2, pp 600-631 Corps Prof. McCann
Board is guilty of corporate waste only if
Transaction is so one-sided that no business person of ordinary sound judgment would have concluded that the corporation has received adequate consideration
Compensation as Waste
Lec. 2 Sem 2, pp 600-631 Corps Prof. McCann
If compensation decision concerns non-insider (i.e., not a director), directors alone decide if adequate consideration is received by corporation
If for insider, directors have burden of showing fair to corporation and in good faith – BJR does not apply (because self-interest exception)…UNLESS Full disclosure and subsequent ratification by
disinterested directors or by the shareholders In which case, BJR again protects the directors
The Evolving Good Faith Standard
Lec. 2 Sem 2, pp 600-631 Corps Prof. McCann
Not an independent basis for director liability A subset of the Duty of LoyaltyCaremark remains the standard insofar as
duty to monitor
The Duty of Good Faith and Compensation
Lec. 2 Sem 2, pp 600-631 Corps Prof. McCann
“Spring Loaded” Options: options granted to employees at a time directors reasonably believe value is going to rise in near future as a result of non-public information
“Bullet Dodging” Options: options timed to be issued right after stock is going to drop as the result of information not yet made public
Option Grants and the BJR
Lec. 2 Sem 2, pp 600-631 Corps Prof. McCann
Tyson I:The BJR does not protect directors who grant
spring-loaded or bullet-dodging options if plaintiff pleads and proves:Options were issued per shareholder approved
employee compensation plan andWhen they approved the options the directors possessed
material non-public information that would impact share price and
Issued the options with the intent to circumvent restrictions in the shareholder-approved plan
The Corporate Opportunity Doctrine
Lec. 2 Sem 2, pp 600-631 Corps Prof. McCann
Corporate fiduciary may not take an opportunity for herself if: 1. The Corporation is financially able to exploit the
opportunity 2. The opportunity is within the Corporation’s line of
business 3. The Corporation has an interest or expectancy in
the opportunity, and 4. By taking the opportunity the fiduciary will be
placed in a position inimicable to her duties to the Corporation
The Corporate Opportunity Doctrine
Lec. 2 Sem 2, pp 600-631 Corps Prof. McCann
Corporate fiduciary may take an opportunity for herself if: 1. The opportunity is presented to the fiduciary as an
individual and not in her corporate capacity 2. The opportunity is not essential to the Corporation 3. The Corporation has no interest or expectancy in
the opportunity, and 4. The fiduciary has not wrongfully used Corporate
resources in pursuing or exploiting the opportunity
The Line of Business Test
Lec. 2 Sem 2, pp 600-631 Corps Prof. McCann
Guth v Loft: Fiduciary cannot take opportunity for herself if
A. The corporation is financially able to exploit it B. It is “in the line of the corporation’s business” C. It is of “practical advantage” to the corporation D. The corporation has an interest in the opportunity and E. If the fiduciary were to take the opportunity she would
be brought into “conflict” with the interests of the corporation
The A.L.I. Test
Lec. 2 Sem 2, pp 600-631 Corps Prof. McCann
Fiduciary may not take advantage of a corporate opportunity unless:
A. The fiduciary first offers it to the corporation and discloses the conflict of interest.
B. The corporation rejects the opportunity andC. Either the rejection is fair to the corporation orD. The decision to reject satisfies the BJR orE. The rejection is authorized in advance
following disclosure by disinterested shareholders and does not constitute waste.
ALI Test Continued:
Lec. 2 Sem 2, pp 600-631 Corps Prof. McCann
What is a corporate opportunity?A business opportunity presented initially by
someone who believes it is being presented to the corporation.
An opportunity developed using corporate information or property
Any opportunity which a senior executive knows is closely related to the corporation’s current or projected business activities
Duties of Controlling Shareholders
Lec. 2 Sem 2, pp 600-631 Corps Prof. McCann
A dominant shareholder owes a fiduciary duty to the corporation to conform its actions to the “intrinsic fairness” doctrine.
Such a shareholder bears burden of proving transaction was objectively fair.
BUT only comes into play when self-dealing is involved, where parent is on both sides of transaction with subsidiary and receives benefit from the transaction that minority shareholders of subsidiary do not.
Intrinsic Fairness vs BJR
Lec. 2 Sem 2, pp 600-631 Corps Prof. McCann
Absent showing transaction benefited dominant s/h and not minority, standard is BJR
Example: declaring dividend which equally applies to minority s/h not unfair regardless of disparity in number of shares held If transaction satisfies BJR re methodology, will be
upheld unless Improper motive and Amounted to waste