Bagley 5th Ed'

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CHAPTER 20 Directors, Officers, andControlling
Shareholders (pp.747-758)
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Business Judgment Rule and Duty of Care

• Under the business judgment rule a court will
  normally let a decision by a corporate board
  acting in good faith stand and not replace it
  with the courts own decision.

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Business Judgment Rule and Duty of Care

• Informed Decision required for the business
  judgment rule.
• Case 20.1 Smith v. Van Gorkom (1985).
• Reliability of Officers Reports - cannot be
  taken on blind faith.
• Reliability of Experts Reports - the board
  should hire reputable advisors and engage in
  reasonable oversight of them conclusions drawn
  by experts should have a stated, factual basis
  for them.

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Business Judgment Rule and Duty of Care

• Reasonable Supervision.
• Directors have a responsibility to exercise
  reasonable supervision over corporate operations.
• Case 20.2 In Re Caremark International
  Derivative Litigation (1996).

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Business Judgment Rule and Duty of Care

• Disinterested Decision the business judgment
  rule does not apply if the directors have a
  conflict of interest.
• Disclosure Violations by Directors.

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Statutory Limitations on Directors Liability for
Breach of Duty of Care

• Delawares Statute 102(b)(7) permits the
  certificate of incorporation to limit or
  eliminate directors personal liability for
  monetary damages for breach of fiduciary duty
  but not for a breach of loyalty, bad faith, or
  violation of securities laws.
• Californias Statute more restrictive than
  Delaware e.g., liability for an unexcused
  pattern of inattention that amounts to an
  abdication of corporate duties.

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Duty of Good Faith

• Directors must not passively stand by when they
  become aware of potentially troubling
  developments.
• Directors who consciously ignore risks could
  loose protection of business judgment rule.
• Case 20.3 In re Abbott Laboratories Derivative
  Shareholders Litigation (2003).

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Duty of Loyalty

• Corporate Opportunities directors may not take
  personal advantage of corporate opportunities.
• If so, there may be a constructive trust. Courts
  apply several tests, including the line of
  business test.

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