DIRECTOR AND OFFICER DUTIES AND INDEMNIFICATION Flashcards
(25 cards)
Directors two Duties
Duty of Care
Duty of Loyalty
Duty of Care
The duty of care applies to board decisions in which a director does not have a self-interest.
Duty of Care-Omissions
o Omissions are determined using the basic “ prudent person_”
Standard: Directors have the responsibility to act with the care of an ordinarily prudent person in a like position and similar circumstances. If directors have special skills, they are required to make use of these skills.
When a shareholder is challenging an act of the director, what two additional doctrines are applied that help protect the director
Reliance
Business Judgment Rule
Reliance
A director is entitled to rely on personal and reports provided by:
- Officers and other employees;
- Outside experts such as attorneys or investment bankers; and
- Committees of the board.
Business judgment rule
If a director actually makes a decision and doesn’t have a
Personal interest in the decision, courts apply the business judgment rule.
There is a rebuttable presumption that the director reasonably believed his actions were in the best interests of the corporation.
The presumption is rebuttable by clear and convincing evidence, and directors will be found liable for breaching their duty of care, under the following circumstances:
Business judgment
Failure to inform
o The director did not adequately inform herself before approving the decision;
o There was a sustained failure by the director to devote attention to an ongoing
Oversight of the business and affairs of the corporation; or
o The director failed to timely investigate a matter of significant material concern after being alerted in a manner that would have caused a reasonably
Attentive director to do so.
Business Judgment
Self-interest
The director acted disloyally.
Business Judgment
Lack of good-faith
The director did not act in good faith.
Ohio’s Constituency Statute:
In determining what the director reasonably believes to be in the best interest of the corporation, the director must consider the interests of
The shareholders and, in his discretion, may consider the interests of:
o Employees, suppliers, creditors, and customers of the corporation
o State and national economy
o Community and societal interests
o Long- and short-term interests of the corporation and shareholders
Duty of Loyalty
A director or board must not put
Their personal interest ahead of the interests of the corporation.
Duty of loyalty three separate duties of a director
- Self-dealing Transactions
- Corporate Opportunity Doctrine
- Competition with the Corporation
Self-dealing Transactions defination
A self-dealing transaction is a corporate transaction in which the director (or a relative of the director) has a self interest.
The most common example is a contract between the corporation and the director (or a business in which the director has a stake.)
Self-dealing Transactions Rule
The interested director is required to disclose her interest to the board. In the absence of disclosure, the director will be found to have breached her duty unless she can show that the transaction was fair to the corporation.
Self-dealing Safe Harbors
In Ohio, a self-interested transaction may be upheld if:
It is disclosed to, and approved by, a majority of the board’s non- interested directors;
It is disclosed to and approved by a majority of shareholders without a conflicting interest; or
If it is fair and approved by a majority of disinterested directors or shareholders.
Self-dealing Remedy
The usual remedy for a breach is to rescind or enjoin the transaction, or to require the interested director to disgorge (give up) her excess benefit.
Corporate Opportunity Doctrine Rule
A director is expected to first offer the opportunity to the corporation, and pursue the opportunity only if a disinterested board rejects it (uninterested or unable to pursue the opportunity.)
If the director simply takes the opportunity without presenting it to the corporation, the key question is
whether it was actually a corporate opportunity
The line of business Test
Is the opportunity in the company’s field? Four factors:
o Knowledge of the investment or business opportunity was gained by the director in his fiduciary capacity;
o The opportunity was within the line of the corporation’s business;
o The opportunity would have been advantageous to the corporation; and
o The corporation would have been able to accept the opportunity.
Competition with the Corporation
A director may also be found liable for breaching her duty of loyalty if she engages in a business that competes with the corporation.
Indemnification
Indemnification is the corporation’s promise to pay the costs of a director’s defense of litigation against her.
Mandatory indemnification
The corporation is required to pay the costs of defense if the director successfully defends.
Prohibitive indemnification
The corporation cannot indemnify against liability for receipt of an improper personal benefit.
Permissive indemnification
The corporation may, but is not required to, indemnify a director for the costs of an unsuccessful suit if the director:
Acted in good faith, with the reasonable belief her actions were not opposed to those of the corporation; and
In a criminal case, the director did not have reasonable cause to believe the conduct was unlawful.
