Fiduciary duties of corporate officers and directors - Next Generation Bar Exam

1. What must a director or officer do before taking a business opportunity that belongs to the corporation?

   Offer it to the corporation and take it only if the corporation rejects it. Taking a corporate opportunity without first offering it is a breach of the duty of loyalty.

2. A director learns that the corporation is negotiating to buy a parcel for expansion and secretly buys it herself. What duty has she breached?

   The duty of loyalty, by usurping a corporate opportunity. The corporation had an interest in the parcel, and she did not offer it to the corporation first.

3. Under the MBCA safe harbors, how may a director's conflicting-interest transaction be protected from challenge?

   Approval by qualified directors or disinterested shareholders after disclosure, or proof that it was fair to the corporation. The safe harbors apply only after full disclosure of the director's interest and the material facts.

4. What fiduciary duty do controlling shareholders owe to minority shareholders?

   A duty not to use their control to benefit themselves at the minority's expense. Courts apply heightened scrutiny, such as entire fairness review, to controller self-dealing.

5. What overcomes the business judgment rule?

   Fraud, illegality, a conflict of interest, bad faith, or gross negligence in becoming informed. When the presumption is rebutted, the burden shifts to the directors to justify the decision.

6. On whose reports may a director rely in good faith in discharging the duty of care?

   Officers, employees, committees, and professionals the director reasonably believes reliable and competent. Reliance is not in good faith if the director knows facts making it unwarranted.

7. Under the MBCA, what standard of conduct governs a director's duty of care?

   Acting in good faith with the care that a person in a like position would reasonably believe appropriate. Directors must also act in a manner they reasonably believe to be in the corporation's best interests.

8. What does the directors' duty of oversight require?

   A good-faith effort to ensure that adequate information and reporting systems exist. Liability requires a sustained or systematic failure to exercise oversight, a demanding standard.

9. Under the line-of-business test, when is an opportunity a corporate opportunity?

   When it is closely related to the corporation's existing or prospective business. Jurisdictions differ; other tests ask whether the corporation had an interest or expectancy in the opportunity.

10. What does the business judgment rule presume?

    That directors acted on an informed basis, in good faith, and in the honest belief that the action served the corporation. Courts will not second-guess a decision protected by the rule, even if it turns out badly.

11. A board approves a merger in a two-hour meeting on the CEO's oral summary, without reviewing a valuation or the documents. Why may the business judgment rule not protect them?

    They were grossly negligent in failing to inform themselves. The rule protects only decisions made on an informed basis.

12. What fiduciary duties do corporate officers owe?

    The same duties of care and loyalty that directors owe. Officers must also inform superiors of material information within their responsibility.

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