978-0077733711 Chapter 43 Solution Manual

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Chapter 43 – Management of Corporations

V. ANSWERS TO PROBLEM CASES

1.Citing Nebraska corporate law that is identical to the MBCA, the court ruled that a trial court

may remove a director in an action brought by shareholders holding at least 10 percent of the

outstanding shares if the court finds that the director engaged in fraudulent or dishonest

conduct or engaged in a gross abuse of authority or discretion with respect to the corporation

2. No. Although general corporation law might find that the fiduciaries had failed to act

prudently by failing to encourage diversification by the plan participants, this case was

decided under the Employee Retirement Income Security Act (ERISA), which has some

provisions that better protect fiduciaries from liability to the plan participants. The court held

that ERISA expressly exempts fiduciaries of this type of pension plan (in which participants

3. Yes. Directors have, at least, the duty to supervise the officers. At a bare minimum, a

director should ask for and read the annual financial statements of the corporation and react

appropriately to what a reading of the statements revealed. The court rejected the sexism

4. The court held that the Cubs were not required to “follow the crowd” by having night games

like other baseball clubs. The judgment of the directors of a corporation enjoys the benefit of

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Chapter 43 – Management of Corporations

Note that the Cubs, under different ownership today, have put lights in Wrigley Field and are

playing night games. The Cubs rationale for wanting lights is that without lights games must

be played during hot days in July and August (causing the players to tire faster during the

5. No. He did not perfect the bank’s security interest in the subcontract rights or demand that

payments under the subcontract be directed to the bank. Note that at the least Gray should

6. The shareholder brought a derivative action complaining that the director defendants

breached their duty of attention or care in connection with the on-going operation of the

corporation’s business. The claim was that the directors allowed a situation to develop and

continue which exposed the corporation to enormous legal liability and that in so doing they

7. Yes. The court held that Michael breached his fiduciary duty of confidentiality. The court

noted that although the majority may be managing the business and affairs of the corporation,

a dissident board member like Michael has significant freedom to challenge the majority’s

8. No. The court found that the disgorgement provision did not require that Baker and Gluk act

with scienter. It found that SOX section 304 tied in closely with the various duties required

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Chapter 43 – Management of Corporations

9. The Delaware Supreme Court held that the board of directors complied with the Unocal test.

The court affirmed the trial court’s finding that the directors satisfied the Unocal test by

showing they had reasonable grounds to believe the parent’s stock ownership endangered the

10. No. The court dismissed the shareholders’ action against the directors and Cole. As for the

directors who composed the special committee, the court found no authority to support the

conclusion that a director lacks independence solely on the ground that he or she is elected by

a controlling shareholder. The shareholders also failed to establish harm to the corporation

caused by the directors failing to solicit third-party bids. Cole consistently asserted that he

As for Cole, the shareholders’ main argument was that Cole acted unfairly by publicly stating

that he would not participate in any third-party transactions, that is, that he would not agree to

sell his stock in any such proposed deal, which undermined the special committee’s

bargaining power against Cole, and significantly curtailed the special committee’s ability to

11. Yes. Section 304 of the Sarbanes-Oxley Act of 2002 requires reimbursement by chief

executive officers and chief financial officers of certain compensation and stock sale profits

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Chapter 43 – Management of Corporations

12. Yes. She was found guilty for her conduct from the beginning of the fraud scheme and

sentenced to 97 months in prison. The court wrote that Gigi notarized documents, was a

named officer, and opened corporate accounts in the early days of the scheme, permitting the

13. Under the default rule of the MBCA, the corporation is permitted to make advances to a

director to cover litigations expenses if the director affirms she meets the requirements for

permissible indemnification and she promises to repay (usually in the form of a promissory

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Chapter 43 – Management of Corporations

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Director loses or settles

Director wins.

Indemnification

mandatory.

Corporation must pay

director’s litigation

expenses.

Corporation may not

indemnify the director.

Indemnification

permissible.

Litigation against a Director Arising from the Director’s Performance of Her Corporate Duties

Indemnification must be approved by disinterested

directors, disinterested shareholders, or independent legal

counsel.

Director must reasonably believe she acted in the best

interests of her corporation.

Director must act in good faith.

Director must have no

reason to believe and not

believe her conduct was

unlawful.

Corporation may pay

director’s litigation

expenses and criminal

fine.

Corporation may pay

director’s litigation

expenses and judgment

or settlement amount.

Corporation may pay

director’s litigation

expenses only.

Director did not receive

an improper financial

benefit.

Director received an

improper financial

benefit.