Business Law Study Set 13
Quiz 48 :
Management of Corporations
Refer to the case In re Bear Stearns Litigation to answer question as below: Facts to this case • A financial company entered a merger with a banking company in which the finance company's stocks would be valued at $10 per share. • The directors were told by their advisors that this was a fair exchange price. • Shareholders disagreed with this price and sued Case Issue The issue is what defenses are available to the board of directors in this suit. Relevant Terms, Laws, and Cases Business Judgment Rule - is a defense when board of director's actions causes damage, but taken in a manner that was informed, in good faith, and in the interest of their company, then they may be precluded from a lawsuit for the damage. Analysis and Conclusion The board in this case may state the business judgment rule defense. In fact, the court stated that the plaintiffs (shareholders) have the burden to prove that the board breached their fiduciary duty to the company or acted in bad faith. The court held for the board. They argued that: • The board had no self interest in the merger and they were not affiliated with the acquiring banking company. • There was no proof that they acted in bad faith. • The lowered stock price level was due to the financial emergency the company faced and the board's decisions have prevented the firm from bankruptcy. • Thus, the board showed that it acted reasonably in light of these dire circumstances. Therefore, the board had a valid business judgment defense.
Refer to the case Casey v Brennan to answer question as below: Facts to this case • A banking company approved a cash buy out for its stocks to lower the amount of shareholders in order to file to become a Subchapter S Corporation (S Corp) • The banking company was told in error to price their stock at $70 when it was worth $110. • Some shareholders had sold their stocks at the $70 range. • They sued the board of directors for the underpayment. Case Issue The issue is whether the board of directors is personally liable for underpayment in buying the shareholder stocks. Relevant Terms, Laws, and Cases Business Judgment Rule - is a defense when board of director's actions causes damage, but taken in a manner that was informed, in good faith, and in the interest of their company, then they may be precluded from a lawsuit for the damage. Analysis and Conclusion The board is not personally liable as long as they acted in good faith or in reliance on financial reports written by "independent public accountant or certified public accountant or firm of such accountants." The accountant's opinions were flawed and the board relied on it, the board can't be held personally liable.
Refer to the case Dunaway v Parker to answer question as below: Facts to this case • A majority shareholder sold his corporation's assets to a competitor. • The majority shareholder, a president of the company, also received money for signing a non-compete covenant with the competitor. • Minority shareholders claimed that this was a breach of the president's fiduciary duty to them. Case Issue The issue is whether the president breached his fiduciary duty to the shareholders. Relevant Terms, Laws, and Cases Non-compete agreement - is a contract signed by two parties where one of the parties agrees not to compete in business with the other party. Non-compete clauses may appear in employment contract and sale of business contract. Analysis and Conclusion The president had a conflict of interest when he received money for a non-compete agreement. This was something which should have been disclosed to the corporation, which he did not do. Thus, there was insufficient disclosure of his self-interest. Therefore, it is a case of breach of fiduciary duty as the president received money for his dealings and gave money to himself with corporate funds.