Chapter 43 – Management of Corporations
43–17
© 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.
court refuse to enhance her sentence on the grounds she owed a heightened fiduciary
duty to shareholders? The court found that while Jensen was an important internal
officer, externally as far as shareholders were concerned she was not making policy
decisions that showed she owed a heightened duty to shareholders. Nonetheless, the
kindly on obstruction of justice.
Additional Point for Discussion: Ask students how much prison time Jensen was
detention.
Additional Example: Problem Case #12.
M. Insurance and Indemnification
1. As if the business judgment rule and recent changes in the duty of care were not enough,
well. All large publicly held corporations buy liability insurance for their directors and
liability risk.
2. Go through the indemnification rules. We deleted Figure 2 that was in the 11th edition,
depending on who is the plaintiff and whether the action is criminal. Note that a director
Example: Problem Case #13.
3. Ethics in Action: News Corporation and Its Directors Agree to Largest Shareholder Suit
Settlement (p. 1146): It seems that new records are set at least yearly. Track more recent
shareholder actions to update in class the material in this ethics box.
4. Ethics in Action: Expanding Indemnification (p. 1146): The ethics questions in this box
place students in the positions of shareholder and director, showing that one’s viewpoint
talent would require extending protection to a director who acted in bad faith. A director
should not fear promising that minimal amount of due care. A shareholder would argue
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that the corporation will not maximize its profits if it selects as a director someone who
wants protection from careless and dishonest errors in judgment.
IV. RECOMMENDED REFERENCES
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
court found that the acts of Jon and Frances reflected in the other cases were invariably
several years old, dating from 2003 or earlier and that there was no objective evidence of
N.W.2d 182 (Neb. S. Ct. 2007).
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
investments in employer stock. ERISA also exempts such fiduciaries from any duty of
prudence, but only to the extent a duty of prudence would otherwise required diversification.
the court was not willing to consider whether the fiduciaries had acted properly by allowing
investments in the employer’s stock. This case, by the way, is one of the first of what will
Countrywide Fin. Corp., 2008 U.S. Dist. LEXIS 27431 (C.D. Cal. 2008).
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
doing. Mrs. Pritchard failed to make any effort to discharge her directorial responsibilities.
Had she paid the slightest attention to her duties as a director, she would have known what
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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
pleasant for patrons and maintain the value of Wrigley Field.
Note that the Cubs, under different ownership today, have put lights in Wrigley Field and are
dictate shall be played at night would have to be played away from Wrigley Field. Ask your
students whether a shareholder who sues to force the Cubs to remove the lights would be
5. No. He did not perfect the bank’s security interest in the subcontract rights or demand that
secured transactions law so they do not make documentation errors. Omnibank of Mantee v.
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
even though it found that the record did not support the conclusion that defendants either
lacked good faith in the exercise of their monitoring responsibilities or conscientiously
(Del. Ch. 1996).
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
the various conflicting factors was necessary, making judgments difficult. Here, the most
logical objective of Michael’s actions—strangling the company with a potentially
Del. Ch. LEXIS 224 (Del. Ch. 2012)
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8. No. The court found that the disgorgement provision did not require that Baker and Gluk act
misconduct is in furtherance of that purpose: it ensures corporate officers must not merely
Tex. 2012).
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
NOLs, the defensive measures taken were not preclusive as the 4.99 percent trigger would
NOLs were a corporate asset worth protecting, that the NOLs were at risk as a result of
Trilogy’s actions, and that the steps that the board ultimately took were reasonable in relation
to that threat. Versata Enterprises, Inc. v. Selectica, Inc., 5 A.3d 586 (Del. S. Ct. 2010).
10. No. The court dismissed the shareholders’ action against the directors and Cole. As for the
shareholders failed to allege any facts that, if true, demonstrated that the decision not to seek
other bids constituted a breach of fiduciary duty. The shareholders’ core claim was that they
believed a higher price could have been obtained by the special committee. This assertion
was based on comments from outside analysts and from the shareholders’ speculation about
transaction.
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
demonstrate that Cole acted improperly by negotiating as low a price as possible for the
Chapter 43 – Management of Corporations
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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.
buyout. No law requires Cole to subvert his own economic interest in obtaining a low price
to the minority shareholders’ interest in obtaining a higher price. In re Kenneth Cole Prod.,
Inc., 2013 N.Y. Misc. LEXIS 4026 (N.Y S. Ct. 2013).
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
restricted stock units, and 78,763 shares of restricted stock. This reimbursement represented
McCarthy’s entire fiscal year 2006 incentive bonus ($5,706,949 in cash and 40,103 in
12. Yes. She was found guilty for her conduct from the beginning of the fraud scheme and
activities well before December 1999. Her attempts to align herself with other relatives of
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
Chapter 43 – Management of Corporations
Litigation against a Director Arising from the Director’s Performance of Her Corporate Duties
Director wins.
Indemnification
mandatory.
Corporation must
pay director’s
litigation expenses.
Director loses or settles
Director received an
improper financial
benefit.
Director did not
receive an improper
financial benefit.
Corporation may
not indemnify the
director.
Indemnification
permissible.
Plaintiff is director’s
corporation.
Plaintiff is not
director’s corporation.
Criminal action
against director.
Corporation may
pay director’s
litigation expenses
only.
Corporation may
pay director’s
litigation expenses
and judgment or
settlement amount.
Corporation may
pay director’s
litigation expenses
and criminal fine.
Director must have
no reason to believe
and not believe her
conduct was
unlawful.
Director must act in good faith.
Director must reasonably believe she acted in the
best interests of her corporation.
Indemnification must be approved by disinterested
directors, disinterested shareholders, or independent
legal counsel.