Business Organizations
2010 - 2011 Lectures
PARTNERSHIPS,
CORPORATIONS
AND THE VARIANTS
PROF. BRUCE MCCANN
LECTURE 13
DUTY OF CARE
Directors’ Duty of Care
 Francis v United Jersey Bank:
 Director is fiduciary of the corporation and its
shareholders
 And in the context of the business of the corporation,
may be a fiduciary to its creditors

Where there is constructive or actual trust
 Director must “discharge duties in good faith
and with that degree of diligence, care and
skill which ordinarily prudent men would
exercise under similar circumstances in like
positions”
Lec. 13, pp 519-568 Corporations
McCann
Prof.
Francis v United Jersey Bank
 Where director breaches duty, personally liable if
negligence was a proximate cause of a loss to the
creditor or shareholder or corporation
 Plaintiff has burden of showing loss would have been
avoided if defendant had performed her duties
 Analysis includes determination of “reasonable
steps” director should have taken
 BUT causation will be inferred where reasonable to
conclude particular result from a failure to act and
that result has occurred.
Lec. 13, pp 519-568 Corporations
McCann
Prof.
Caremark
 Director liability can be grounded on several
theories:


Liability following poor decision by board because
decision was negligent and ill advised
Liability based on failure to act where due diligence
would prevent the loss
 BUT, “absent cause for suspicion there is no
duty…to install and operate a system of
corporate espionage to ferret out wrongdoing
that they have no reason to suspect exists.”
Lec. 13, pp 519-568 Corporations
McCann
Prof.
Caremark cont’d
 There must be a system in place adequate to
assure the board that appropriate
information will come to its attention in a
timely manner
 Failure to insist upon and maintain such a
system may render a director liable
Lec. 13, pp 519-568 Corporations
McCann
Prof.
Caremark cont’d
 Plaintiffs must show:
 Director knew or
 Should have known were violations of law
 Took no steps to prevent or remedy
 Failure proximately caused the loss
Lec. 13, pp 519-568 Corporations
McCann
Prof.
Rule
 Model Act and ALI, and most statutes, allow
directors to rely on others if that reliance is
reasonable because the adviser “merits
confidence”
Lec. 13, pp 519-568 Corporations
McCann
Prof.
The Powers and Duties of the Board
 Key Functions:
 Provide
advice and counsel
 Instill discipline in the decision-making of
the corporation
 Oversee crises
 Monitor the conduct of Management
Lec. 13, pp 519-568 Corporations
McCann
Prof.
The Business Judgment Rule
 Applies when what is at issue is a business decision
made by the directors
 Does not come into play where directors are accused
of failing to monitor or similar derelictions of the
duty of care, only when making a business decision
Lec. 13, pp 519-568 Corporations
McCann
Prof.
The Rule
 Absent fraud, illegality or conflict of interest, a
director who acts in good faith is not personally
liable for mere errors of judgment short of CLEAR
AND GROSS NEGLIGENCE
• Shlensky v Wrigley 237 N.E. 2d 776 (Ill. 1968)
 Unless director(s) had an interest in the subject of
the decision or
 Unless decision constitutes illegal conduct (e.g.,
decision to pay a bribe)
Lec. 13, pp 519-568 Corporations
McCann
Prof.
ALI Version
 No liability for a business judgment reached in good
faith provided:
 1. Director or officer was disinterested
 2. Director or officer was informed as to the subject
of the decision to a degree the director or officer
reasonably believes appropriate; and
 3. Rationally believes decision is in the best interests
of the corporation
Lec. 13, pp 519-568 Corporations
McCann
Prof.
Smith v Van Gorkum Timeline
Sep 13, 1980 to
Sep 19, 1980
Van Gorkum (VG) meets
privately with Pritzker
Oct 10, 1980
Dec 19, 1980
AGREEMENT
SIGNED
SUIT FILED
Oct 8, 1980
Board Mtg.,
amendments approved
Sep 22, 1980
Press Release says
"definitive agreement"
Sep 19, 1980
Friday. VG calls Board
Mtg. for Saturday
Sep 20, 1980
Board Mtg. Bd first
hears of proposal but
approves it after 2 hour
meeting
Lec. 13, pp 519-568 Corporations
Sep
1, 1980 Sep 15, 1980
McCann
Oct 1, 1980
Prof.
Oct 15, 1980
Nov 1, 1980 Nov 15, 1980
Dec 1, 1980
SMITH V VAN GORKOM
 "Informed" within meaning of "due care" means
board reviewed all material information reasonably
available
 Liability under Business Judgment Rule
arises only where there is a showing of gross
negligence, meaning something more
careless than ordinary negligence.

E.g., failure to even read a report which was itself
deficient
Lec. 13, pp 519-568 Corporations
McCann
Prof.
Delaware Gen Corp Law Sec. 141
(e) A member of the board of directors, or a member of any
committee designated by the board of directors, shall, in the
performance of such member's duties, be fully protected
in relying in good faith upon the records of the
corporation and upon such information, opinions,
reports or statements presented to the corporation
by any of the corporation's officers or employees, or
committees of the board of directors, or by any other
person as to matters the member reasonably
believes are within such other person's professional
or expert competence and who has been selected
with reasonable care by or on behalf of the corporation.
Lec. 13, pp 519-568 Corporations
McCann
Prof.
Shareholder Ratification
 Shareholders may ratify acts of even interested
directors PROVIDED shareholders are “fully
informed”

Burden is on directors to establish shareholders were fully
informed
Lec. 13, pp 519-568 Corporations
McCann
Prof.
Model Act
SECTION 8.30. GENERAL STANDARDS FOR DIRECTORS
(a) A director shall discharge his (sic) duties as a director, including his (sic) duties as a
member of a committee:
 (1) in good faith;
(2) with the care an ordinarily prudent person in a like position would exercise under similar
circumstances; and
(3) in a manner he (sic) reasonably believes to be in the best interests of the corporation.


(b) In discharging his (sic) duties a director is entitled to rely on information, opinions, reports,
or statements, including financial statements and other financial data, if prepared or presented
by:
 (1) one or more officers or employees of the corporation whom the director reasonably believes
to be reliable and competent in the matters presented;
(2) legal counsel, public accountants, or other persons as to matters the director reasonably
believes are within the person's professional or expert competence; or
(3) a committee of the board of directors of which he (sic) is not a member if the director
reasonably believes the committee merits confidence.

(c) A director is not acting in good faith if he (sic) has knowledge concerning the matter in
question that makes reliance otherwise permitted by subsection (b) unwarranted.
 (d) A director is not liable for any action taken as a director, or any failure to take any action, if
he (sic) performed the duties of his (sic) office in compliance with this section.

Lec. 13, pp 519-568 Corporations
McCann
Prof.
Calif. Corp Code Sec. 309
 (a) A director shall perform the duties of a director, including duties
as a member of any committee of the board upon which the director
may serve, in good faith, in a manner such director believes to be in
the best interests of the corporation and its shareholders and with
such care, including reasonable inquiry, as an ordinarily prudent
person in a like position would use under similar circumstances.
 (b) In performing the duties of a director, a director shall be entitled
to rely on information, opinions, reports or statements, including
financial statements and other financial data, in each case prepared
or presented by [officers, consultants, etc].
 (c) A person who performs the duties of a director in
accordance with subdivisions (a) and (b) shall have no
liability based upon any alleged failure to discharge the
person's obligations as a director. In addition, the liability
of a director for monetary damages may be eliminated or
limited in a corporation's articles to the extent provided in
paragraph (10) of subdivision (a) of Section 204.
Lec. 13, pp 519-568 Corporations
McCann
Prof.
Arnold v Society for Savings
 Lock-up provision is a term used in corporate finance
which refers to the option granted by a seller to a buyer
to purchase a target company’s stock as a prelude to a
takeover. The major or controlling shareholder is then
effectively "locked-up" and is not free to sell the stocks to
a party other than the designated party (potential buyer).
 Typically, a lockup agreement is required by an acquirer
before making a bid and facilitates negotiation progress.
Lock-ups can be “soft” (shareholder permitted to
terminate if superior offer comes along) or “hard”
(unconditional).
Lec. 13, pp 519-568 Corporations
McCann
Prof.
No Shop
 No-shops are promises by one or both corporations
involved in a merger only to deal with their merger
partner and not to solicit other bids or provide
information to other possible bidders.
Lec. 13, pp 519-568 Corporations
McCann
Prof.