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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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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 43 - Management of Corporations
43-5
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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.
