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Chapter 43 - Management of Corporations
43-11
© 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.
Note the changes that make it even more difficult to hold directors and officers
liable under the duty of care. Some states have changed the standard to a
liability of directors and officers.
6) Opposition to Acquisition of Control
A boards’ use of tactics to defend against hostile tender offers has created
special problems for courts’ deciding whether to apply the business judgment
rule. Although most enlightened commentators believe that self-preservation is
favoring defense tactics may reflect the judges’ disdain for hostile tender
offers. [You may wish to refer here to the materials on tender offer
legislation, especially the federal law, whose purpose is to promote an
auction market for corporate shares. This is covered in Chapter 45 at pages
interests of the corporation.
c) Cover the three elements of the Unocal test on page 1130.
Paramount Communications, Inc. v. Time, Inc. (p. 1132). The court refused
to apply the business judgment rule to the decision to oppose Paramount’s
business judgment rule prematurely by stating that the court can’t substitute
its judgment regarding what is a better deal? Has the court provided a
“trump card” for all directors opposing a takeover by validating the
directors’ concern that shareholders might be ignorant or mistaken as to the
Time’s having negotiated a combination with Warner prior to Paramount’s
initiation of its takeover? It was the most important fact, for it proved that
Chapter 43 - Management of Corporations
43-12
© 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.
Time’s directors were motivated to combine with Warner for honest
business reasons, not merely to defeat a hostile takeover.
Additional Example: Problem Case # 9.
7) The business judgment rule and derivative suits. You may want to cover this
important issue at this point. It is discussed in Chapter 44. In states in which the
liability.
3. Duties of loyalty
a. Introduction
1) Explain the general duty of loyalty, as expressed by Judge Cardozo on page
Example: Problem Case # 7.
b. Conflicting Interest Transactions
1) Explain the conflict of interest that arises when a manager deals with his
corporation. Note the divided loyalties that exist and the risk that the manager
will prefer his own interests to those of the corporation.
2) Explain the intrinsic fairness standard and how it protects the corporation.
3) Note the burden-shifting effect of a manager obtaining board or shareholder
approval of a self-dealing transaction. Approval by itself is not enough to
irrelevant.
Note the variety of statutory schemes that dictate the formalities to be followed
permit an interested shareholder to vote; others do not. Some statutes require
disclosure of only the manager’s interest; others require disclosure of all material
facts as well.
4) Example: Problem Case # 8.
5) Ethics in Action: Sarbanes-Oxley Act of 2002 Prohibits Loans to Management
(p. 1135): The jury is out on the need for and effectiveness of the Sarbanes-
Oxley Act. The Act’s ban of most loans to management is one reason. For
many years, loans have been a part of a manager’s compensation package. The
corporation are not banned.
Chapter 43 - Management of Corporations
43-13
© 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.
A rights theorist would consider the ranking of various rights, including a
manager’s right to receive a loan as a form of compensation, the corporation’s
right to compete for executive talent by offering loans, a corporation’s right not
to have its assets looted, and a corporation’s right to protect itself from looting
through internal corporate policies rather than by a law banning loans. There are
other rights to be considered. A utilitarian will consider the law’s effect on total
social welfare and consider whether the negative effects of the law (eliminating a
form of executive compensation) will be overcome by the benefits (making
corporation.
Note that SOA does not prevent banks and other financial institutions from
making loans to their management.
c. Usurpation of a corporate opportunity
2) Opportunity has a relation to corporate business.
Examples:
interest.
b) An opportunity to buy one-half acre of prime commercial real estate. This
opportunity would be in the line of business of a real estate investment
for expansion.
3) Corporation able to take advantage of the opportunity.
4) Guth v. Loft, Inc. (p.1136). List and go through the elements of usurpation with
this case.
Points for Discussion: What facts prove that Guth received the opportunity in his
corporate capacity? That Megargel contacted Guth about the opportunity when
Guth was president of Loft. Nothing in the facts suggests that Megargel
on the lookout for opportunities useful to the corporation.
What facts prove that the opportunity had a relation to Loft’s business? Loft was
in the business of manufacturing syrups. Therefore, manufacturing Pepsi was in
Chapter 43 - Management of Corporations
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its line of business. Also, Guth knew that Loft needed a steady supply of cola
syrup to allow it to offer its customers a cola drink. Hence, Loft had an interest
or expectancy arising out of Guth’s knowledge of Loft’s need for a supply of
cola syrup.
Additional Point for Discussion: Note the effect of the court’s decision. Loft
gets all of Guth’s Pepsi shares and all of his dividends received from Pepsi. In
Additional Point for Discussion: You might mention that Guth is the single most
important person in the history of Pepsi. He made Pepsi what it is today,
d. Oppression of minority shareholders
majority shareholders on page 1172-1174.
3) Freeze-outs. Some of the most interesting oppression cases in recent years have
been the freeze-outs cases, especially going private transactions. Going private
a) Freezeout Methods. Go though the methods in the textbook: the reverse
In addition, dissolution of the corporation and sale of assets to a corporation
is the same.
b) Purposes of freeze-outs. Usually corporations freeze out minority
Chapter 43 - Management of Corporations
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c) Legality. By itself, a freeze-out is not wrongful. However, it can be
accomplished in a wrongful way. Note that although Delaware has
abandoned the business purpose test as unworkable, other states follow it.
Note the two elements of the intrinsic fairness test: fair dealing and fair
one has the right to remain a shareholder unless she has taken contractual
precautions to prevent a going private transaction.
Coggins v. New England Patriots Football Club, Inc. (p. 1138). The court
fairness test.
Points for Discussion: Why did the court decide that the business purpose
Because the danger of abuse of fiduciary duty is especially great in a freeze-
obligations.
Ask your students whether the court would have legitimized the freeze-out
had it applied only the intrinsic fairness test.
Additional Example: Problem Case # 10.
d. For an excellent new case on valuing shares, see the MCHC case in Chapter
44 on page 1157.
1140): Note the duties imposed on management of public companies: certifying
financial statements and disgorging compensation and profits.
Example: Problem Cases ## 8 and 11.
5. The Global Business Environment: Directors’ Duties around the Globe (p. 1140): Not
complies with those standards.
Chapter 43 - Management of Corporations
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I. Disclosure of Merger Negotiations
J. Director Right to Dissent
Note how directors who disagree with an imprudent or otherwise improper decision of the
board may escape liability for damages caused by the decision: the director may not vote to
approve the transaction and must attempt to dissuade the rest of the board.
K. Duties of Directors and Officers of Nonprofit Corporations
L. Tort and Criminal Liability
1. Torts. Agents are always liable for their own torts. Corporations are liable for their
agents’ negligent and intentional torts if committed within the course and scope of
employment. Refer to the principles of respondeat superior in Chapter 36.
2. Crimes. Review the evolution of the law to its present state of imposing criminal
welfare.
United States v. Jensen (p. 1141). This long case will help your students appreciate the
facts and issues regarding options backdating, a huge issue in 2006 and 2007. It also
Points for Discussion: Why did the court conclude that Jensen knowingly violated an
SEC rule? The evidence showed that she knew her conduct was wrongful, because she
tried to conceal the date options were really issued, and she directed employees not to
communicate about options by phone or email. Those are not usually actions of
are routed to the finance department, the forms must have some affect on the company’s
financial statements. A reasonable officer would also know, therefore, that falsifying
option grant forms would impair the integrity of the company’s financial statements, a
violation of SEC rules.
