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
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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

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
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Fairness: means fair price and fair dealing
(substantive and procedural fairness)
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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
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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.
b) 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
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Individual or corporate capacity
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Financial capacity
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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…..
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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…..
 In my opinion only a sustained systematic failure of the board to…..lack of good faith that is a necessary condition to liability
 STONE CASE: we hold that Caremark articulates……risks or problems requiring their attention.
 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)
 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