Duty of Care ; Business Judgment Rule – Flashcards

Gross Negligence in MBCA in Del based on case law - Van Gorkem Gross Negligence - directors fail to inform of material facts of a transaction Directors owe fiduciary duty to shareholdres

rebuttable presumption that the board has acted in accordance with its fiduciary duties 1. In good faith 2. In an informed manner 3. Without a conflict of interest 4. In the honest belief that its actions are in the best interest of the corporation BJR shields directors from personal liability for their business decisions Greater pleading and burden of proof requirements for plaintiffs

May dispute 1. Lack of good faith 2. Conflict of interest 3. Not informed 4. Fraud or illegality 5. Waste 6. "honest belief that decision is not in best interest of corporation"

1. Encourages boards to take risks 2. Encourages individuals to serve on boards 3. Judicial expertise - board would better handle case 4. Shareholders take reasonable risks and should only be able to change decision in very egregious cases

1) action brought by the corporation at behest and under director of directors or 2) "Derivative action" brought by one or more shareholders Rule: courts allow derivative action when managers are unable to impartially and in good faith control a lawsuit

- Del - Duty of Care defined by Judicial Doctrine - Most states like pre 1998 MBCA §8.30(a)(2) - requiring "care an ordinary prudent person in a like position would exercise under similar circumstances" - 1998 §8.30(b) - signal that principals of corporations, not torts should apply

Facts: Ford did not pay dividends to shareholders despite a large profit, instead choosing to expand production Issue: whether Ford violated fid duty to shareholders Procedure: lower court gave damages and costs Holding: Yes, but no costs Rationale: - Ford could still maintain profits, expand, and have enough cash to pay new plant, Ford didn't limit his own pay or that of officers - No duty owed general population, should instead worry about duty to shareholders. Rule: To withhold dividends from shareholder in Ford's situation cannot be considered acting in good faith to shareholders.

Facts: Wrigley owns 80% of stock and refuses to install lights and hold night games. He does this for concern of the neighborhood, not revenue. Issue: Whether minority stockholders could bring derivative action. Holding: no - dismissal of suit was required Rationale: no fraud, illegality, or conflict of interest present on board. Reasonable reasons to want to preserve neighborhood.

Rule: Negligence is insufficient to uphold a plaintiff's claim against BJR. Facts: Wrigley owns 80% of stock and refuses to install lights and hold night games. He does this for concern of the neighborhood, not revenue. Issue: Whether minority stockholders could bring derivative action. Holding: no - dismissal of suit was required Rationale: no fraud, illegality, or conflict of interest present on board. Reasonable reasons to want to preserve neighborhood.

Rule: Business judgment rule doesn't extend to situations where decision lacks a business purpose, is tainted with conflict of interest or is a no win decision Policy concerns for scope of business rule 1. Shareholders take risks voluntarily 2. After-the-fact-litigation doesn't evaluate business decisions 3. Potential profit follows risk and therefore can't avoid risky behavior or suffer profits - Inside directors advantages - Inside info, but disadvantage may have blind spots for own business policies and not be totally objective or candid

Hastey - 2 hour meeting Didn't inform themselves (Rebutts BJR) Didn't know how price was arrived upon Physical contract wasn't made available to board Didn't know the subject of meeting until day of

1. Fiduciary duty broken based on lack of information handled by BofD a. Rule BJR exception -BofD not protected when not informed Outside expert not required. 2. Failure to inform shareholders all material information a. fact BofD had no adequate info, re: price of company b. misleading proxy statement c. misleading reference to "substantial premium" offered Dissent- business men w/tons of experience JMcNeilly +CJ Christie

RULE: If plaintiff seeks to rebut BJR on grounds that board did not inform itself, the plaintiff must show that the board's decision-making process was not just negligent, but grossly negligent [p. 336]. 1. Not substance of decision, but grossly negligent decision making process

Reasons a complaint should survive dismissal where an expert advised the board in its decision making process a complaint must show (not sure if necessary) 1. The directors did not in fact rely on the expert 2. Their reliance was not in good faith 3. They did not reasonably believe that the expert's advice was within the expert's professional competence 4. The expert was not selected with reasonable care by or on behalf of the corporation and the faulty selection was attributable to the directors 5. The subject matter that was material and reasonably available was so obvious that the board's failure to consider it was grossly negligent regardless of the expert's advice or lack of advice 6. That the decision of the board was so unconscionable as to constitute waste or fraud

Member of BofD or any committee is not liable for relying on information provided by expert or their officers

Rule: Shareholder ratification does not cure breach = that conclusion of Van Gorkom is old law