Fiduciary Duties of Directors and Officers

Question 1

Mini Outline – fiduciary duties

Answer 1

(1) duty of care
(2) duty of loyalty
(a) conflict transaction
(b) usurpation of corp opportunity
(c) direct competition
(3) liability for breach of duties

Question 2

Director and officer fiduciary duties

Answer 2

Duty of care
Duty of loyalty

Question 3

Duty of care

Answer 3

Directors and officers must act:

▪ in good faith;
▪ with the care an ordinary prudent person in a like position would exercise under similar circumstances; and
▪ in a manner reasonably believed to be in the best interest of the corp.

Question 4

Information rule for duty of care

Answer 4

Directors and officers may rely on information, reports, recordings, and financial data prepared by someone reliable and competent in the matter

Question 5

Business judgment rule

Answer 5

Rebuttable presumption that directors and officers acted:
o on an informed basis;
o in good faith; and
o with an honest belief that the decision was in the corp.’s best interest

Question 6

Violation of duty of care

Answer 6

Directors are liable to the corp. for decisions or failures to act not undertaken in good faith.

A director cannot act in good faith when committing or allowing the corp. to commit illegal acts, even when profitable for the corp.

Question 7

Duty of loyalty

Answer 7

Directors, officers, and employees must act loyal to the corp. and not promote their own interest in a way that harms the corp.

Question 8

Common conflicts of interests (violations of duty of loyalty)

Answer 8

(1) self-dealing
(2) usurping corporate opportunity
(3) directly competing with corp

Question 9

Conflict of interest transaction

Answer 9

A transaction between director or officer
and the corp., of which the director or officer had knowledge and a material financial interest = self-dealing

Question 10

Notification rule for conflicts

Answer 10

The duty of loyalty requires the director or officer to notify the other directors, officers, or shareholders of all material facts regarding the conflict

Question 11

Treatment of conflict of interest transactions

Answer 11

Such transactions are voidable by the corp. UNLESS the interested person can prove that:
* material facts of the conflict were disclosed and fully described to the board and the transaction was approved by a majority of disinterested directors;
* material facts of the conflict were disclosed and the transaction was validly approved by a majority of disinterested shareholders; or
* a court determines the transaction was fair and reasonable to the corp.

Question 12

Court measure for fairness of conflict transaction

Answer 12

Fairness is based on whether the transaction was comparable to what might have been obtained in an arm’s length transaction and whether the process followed by the directors in reaching their decision was appropriate

Question 13

Factors to determine corporate opportunity that cannot be usurped

Answer 13

• business is closely related to that of the corp.
• Board expressed interest in acquiring such a business
• opportunity was discovered while acting in capacity as director/officer
• opportunity was developed or discovered using corporate funds or
  facilities

Question 14

Exception to usurpation rule

Answer 14

Even if the opportunity belongs to the corp., there is no usurpation if after full disclosure:
* the corp. had opportunity to pursue it and declined to do so; or
* the corp. was unable to take advantage of the opportunity

Question 15

Treatment of direct competition with corp

Answer 15

Competition by director or officer is not necessarily a breach of duty if acting in good faith

Covenants not to compete will be enforced if reasonable as to time and area of application

Question 16

Remedy for violating duty of care or loyalty

Answer 16

Directors and officers are liable to the corp. for damages arising from violations of fiduciary duties or unauthorized actions