Chapter 6 Exercises Continued
12) Board Ratification: (this was a former exam question)
a) The Four:
i)
The fact patter signals the duty of loyalty: self-dealing
ii) Good Rule: the 4 will not be liable for self-dealing if the
transaction was ratified
 Self-Dealing: why is there self-dealing
o If the director is on both sides of the
transaction and is SH in the corporation that
the corp (one he is board member of) he is
dealing with, there is an indirect conflict if
there is a material financial interest (one
that one would reasonably believe would
affect the impartiality of the director or
executive)
 Material interest – facts showing
o The 4 own all of beta corp (25% each)
o After the sale, each of the 4 will pocket
7.5 Million
iii) Standard for ratification: Need ratification from
Disinterested directors or shareholders, that are fully informed,
and independent
 fully informed: means all material facts about the
transaction are disclosed
o the facts state the 3 are fully informed
including latent defects which must be
disclosed because of the conflict (not
required in arms-length transaction)
 disinterested:
o the 3 are not SH’s in Beta nor did they
have any other employment or financial
relationship
 independent: cannot be dominated, controlled by,
or beholden to the conflicted directors
o the 4 choose who is on the board; leans
toward being dominated or controlled or
beholden (just because you are nominated
to the board by the conflicted directors
does not mean you are dominated –
RMBCA)
o weighs against dominance, control,
beholden: do not rely heavily on payment
b)
from being board member for family
financials
o all are friends, kids got to school, serve
on non-profit boards together (not enough
to say the 3 are not independent)
o all have been on the same board for 12
years (this is called a structural bias because
it becomes more difficult to vote against
the conflicted) (is a structural bias enough
to show the non-conflicted are controlled,
etc.: not enough to show they are not
independent)
 seems there is a good ratification, but to get all the
points on the exam need to consider what happens if
there was not a good ratification
iv) what if there was not a good ratification
 it looks like there is a good ratification, thus the
court would apply the business judgment rule and
dismiss the case. However, if the ratification was not
valid, the 4 must prove that the transaction was fair to
the corporation
 Fairness: means fair price and fair dealing
(substantive and procedural fairness)
 Relevant facts to substantive fairness (fair price)
o There is conflicting evidence about
whether the price paid was excessive; this is
bad for the person who has the burden of
proving fairness
o Because it is conflicting, this is bad for
the 4
 Relevant facts to procedural fairness (fair dealing –
did they really need that asset is a part of fair dealing)
o There is conflicting evidence about
whether Alpha needed Betas Assets
o All disclosures were made concerning
material facts
v) If the 4 cannot prove fairness there is still an exculpation
clause. However, exculpation clauses do not apply to the duty
of loyalty. Exculpation clauses only protect breaches of the duty
of care.
THE 3
i)
Need to do DUTY OF CARE analysis
ii) Standard for Duty of Care: grossly negligent in the
decision making process (severe departure) (there has been
few cases were courts have said directors were grossly
negligent in their decision making process)
 Relevant facts
o Only spend 20 minutes reviewing and
discussing the information before making
the decision
(i) This is a big decision and more
time should be deliberated making
the decision because the company is
worth 60 million and they are making
a 30 million purchase (evidence for
grossly negligent decision making
process)
(ii) Never tried to negotiate a lower
price
iii) Even if the 3 are found to partake in a grossly negligent
decision making process, the exculpation clause will relieve the
3 from all liability unless there was bad faith. There are no facts
that show bad faith. The case will be dismissed.
iv) If there were facts showing that the 3 were really
dominated by the 4, would want to do an analysis on the 3
being conflicted
14) The duty of loyalty – SH Ratification
A) Acquisition of USAC (and its antimony properties) for a price of 800,000 shares of
Agua stock. No SH vote was required.
B) the D directors voted their shares in favor, they are not disinterested. These shares
constituted a majority of the shares voted in favor of the purchase
C) the court interprets the statute to mean a vote by disinterested SH’s even though the
statute does not say that explicitly. Even though the statute does not say “good faith
vote by disinterested SH’s, it requires it.” In Kentucky, see 8-310: have to have
ratification by the disinterested SH’s. SH’s have to be fully informed, disinterested, and
independent.
D) Fair Price
What could the conflicted board do to make the process more fair? Get a fairness
opinion from an investment bank. A lot of corporations get investor bankers to inform
you if you are paying fair price. Do this to help protect yourself against SH suit. Clear
disclosures of the conflict. More disclosures than typical arm’s length dealing. Show the
corporation need for the transaction.
E) D Directors
F) Antimony properties. Corporation refuses = the directors refused the opportunity. All
the directors then take the opportunity. Raises a corporate opportunity issue (duty of
loyalty)
15) The Duty of Loyalty – Corporate Opportunity
A) no. the board acts as a body but, I have seen some cases
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Page 289 shows the factors
Individual or corporate capacity
Financial capacity
Line of business
o Yes, not dispositive
Corporate interest or expectancy
Competition with the corporation
o Broz interest in acquiring and profiting form Michigan created no
duties that were…..Broz, however, comported…..
See Lindsey email which is below
Please be able to provide the court’s analysis for each of the
factors that help a court determine whether the director
could take the corporate opportunity.
o 1. the corp is financially capable- Court said they
weren’t financially capable. CIS was in a precarious
financial position. Just filed Bankruptcy.
 Even PriCellular had a risky financial
situation.
 And PriCellular had not yet acquire CIS.
o 2. Although it was within the line of business of
CIS. CIS had no interested or expectancy in the
license.
o 3. Interest of expectancy- didn’t exist
 CIS was in the proess of divesting its
cellular license holdings and their business
plan didn’t involve the acquisition of new
license.
o 4. Broz didn’t usurp any opportunity of CIS. CIS
was fully aware of Broz relationship with
PriCellular.
 Broz asked several members of the board if he could take
the opportunity and they all said “yes.” Does this count as
board ratification? Why or why not?
o Court said that the Chancery Court had drafted a
new law essentially that there was a requirement of
a formal presentation under circumstances where
the opportunity does not have an interest,
expectancy, or financial ability.
o Although presentation to the board would have
been more of a safe harbor the Court says it isn’t
required.
 Who had the burden of proof in the case, Broz or the
shareholder plaintiff?
o Burdeon was on Broz to show adherence to his
fiduciary duties.
 What little twist is created by the possible merger
between CIS and PriCellular?
o The Chancery Court said Broz had to consider the
post acquisition plans for CIS in making his
determination. But the Court said that the
opportunity depended on the circumstances
existing at the time it presented itself to him
without regard to subsequent events.
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B) not sure
C) Broz now has to show the transaction was fair
D) at the time Pricellular was not CIS Priceceullular
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Courts response ….read case
16) The Duty of Care
A) gross negligence
B) Very Important Case: must know and understand
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Gross Negligence – facts showing
o No copies of the merger agreement at the meeting held decide
on the merger
o Amended the agreement to make it more fair, but never looked
at the amended agreement
o Did not come up with a price
o Uninformed as to the intrinsic value of the company
o Two hours consideration…without the exigency of a crisis or
emergency
o Board based ist Sep 20 the decision to approve the cash out
merger primarily on Gorkom’s representations
o None of the directors, other than Gorkom and Chelberg, had any
prior knowledge that the purpose of the ….
o At least two more I missed
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Under 8-300 (4) (KY) directors are fully protected in relying in good faith
on reports made by officers
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Fairness
o Something with the 90 day market test: court said the test was
not good enough to show the price was right
 Court: the restriction in the agreement with Pritzker
prevented a good market test
o No real interest
o Premium – $17 over market price of the shares
 Court said how do you know that you could not have
gotten more
o SH’s approved the transaction
 Court: SH’s were not fully informed. The board did not
disclose they had no basis…..
o The collective experience and expertise of the directors
 COURT: so what
C) SH lawsuits are a fact of life. You cannot make uninformed decisions just because you
will be sued if you do not make the decision
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Better Advice: it is about liability. If you have a good decision making
process, not grossly negligent, then less chance to be liable. Make the decision
carefully.
o Advise on the prospects of success of the lawsuit and the
directors fiduciary duties
D) Corporations may put exculpation clauses in their Articles of incorporation
18) Duty to Monitor
A) a duty to attempt in good faith to assure that a corporate information and reporting
system…..render a director liable for losses caused by non-compliance with applicable
legal standards…..
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In my opinion only a sustained systematic failure of the board to…..lack
of good faith that is a necessary condition to liability
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STONE CASE: we hold that Caremark articulates……risks or problems
requiring their attention.
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In either case, imposing……
B) went through too quick
C) went through too quick
19) Fiduciary Duties of Controlling SH’s
A) The dividend went to all the SH’s. if everyone got the dividend, then it is not selfdealing.
B) Sinclair was a major SH of international. It was on both sides of the transaction (i.e.
the decision not to sue international)
C) 3%
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For arguments sake, let’s say international’s breach caused $100k in K
damages to Sinven. If international does not pay Sinven, Sinclaire’s share is
100k. if international pays sinven, sinclairs share is 97k
D)
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Court: the plaintiff proved no business opportunities which came to
sinven independently…..As a matter of fact, with two minor exceptions……by
subsidiaries located in the particular country.
o The only corporate opportunity was in Venezuela