Business Law Chapter 40 Homework Reasonable Care Defined Being The Degree Care

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CHAPTER 40

CORPORATE DIRECTORS,

OFFICERS, AND SHAREHOLDERS

ANSWER TO CRITICAL THINKING QUESTION

IN THE FEATURE

GLOBAL INSIGHT—CRITICAL THINKING

Why do you think officers and directors of accused companies accept dissent decrees

rather than contest accusations at trial? In the last few years, those companies accused of

violating anti-bribery laws, particularly the FCPA, believe that it is most cost effective to

cooperate fully with the government. They also believe it best to undertake exhaustive internal

ANSWERS TO QUESTIONS

AT THE ENDS OF THE CASES

CASE 40.1—CRITICAL THINKING

LEGAL ENVIRONMENT

In a letter to the Oliveiras, the board explained that it saw “no upside—and much

downside—to the action and lawsuit proposed in the Demand.” What would the

“downside” consist of? The downside of the action proposed by the Oliveiras consists of a

variety of likely possibilities whether or not the action was successful.

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In this case, iStar promised awards of company stock to employees if the shares

averaged a certain target price over a specific sustained period before a stated date. The

stock’s value tripled, but the target price was not met. The company’s board modified the

1. iStar was likely to lose a suit based on the Oliveiras’ claim, and incur costly

attorney’s fees in doing so.

WHAT IF THE FACTS WERE DIFFERENT?

Only one member of the iStar board—Sugarman—received an award as an employee.

The others who made the decision to change the award were, like Ridings, outside

directors. Suppose that the opposite had been true. Would the result have been the

same? It is possible that the result in this case would have been the same, even under the

facts given in the question—if only one member of the board had been an outside, non–

management director and the others had received awards.

CASE 40.2—CRITICAL THINKING

WHAT IF THE FACTS WERE DIFFERENT?

Suppose that Loft’s board of directors had approved Pepsi–Cola’s use of its personnel

and equipment. Would the court’s decision have been different? Discuss. Possibly. Guth

contended that the Loft board had approved Pepsi’s use of Loft’s personnel and facilities, but

CASE 40.3—LEGAL REASONING QUESTIONS

1A. How many shareholders were present at the shareholders’ meeting that gave rise

to the dispute in this case? During the shareholders’ meeting of Sink & Rise, Inc., that give

rise to the dispute in the Case case, James (Cale) Case was the only shareholder present in

2A. How did the court “characterize” and “classify” the shares of stock that Cale and

Shirley Case held jointly? The lower court “characterized” the sixteen shares of stock held

jointly by Cale and Shirley as owned with rights of survivorship. The court further “classified” the

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3A. According to the court, how many shares were represented at the shareholders’

meeting? Was a quorum present? Explain. Both the lower court and the state supreme court

agreed that a majority of the outstanding voting shares of Sink & Rise were represented at the

ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE

AT THE END OF THE CHAPTER

1A. Duties of directors

2A. Conflict of interest

The duty of loyalty requires officers and directors to disclose fully to the board of directors any

3A. Breach of loyalty

The business judgment rule immunizes decisions that are made in good faith as long as the

decision complies with the manager’s fiduciary duties and was within the manager’s power to

CHAPTER 40: CORPORATE DIRECTORS, OFFICERS, AND SHAREHOLDERS 5

4A. Shareholder’s suit

If the corporation does not bring suit against Brock for breaching his duty of loyalty, then Peñada

could file a shareholder’s derivative suit to redress a wrong suffered by the corporation. In other

ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE

AT THE END OF THE CHAPTER

Because most shareholders never bother to vote for directors, shareholders have

no real control over corporations. The statistics are indeed shocking—almost no

shareholders of corporations ever bother to vote for directors. Most shareholders don’t know

ANSWERS TO ISSUE SPOTTERS

AT THE END OF THE CHAPTER

1A. Wonder Corporation has an opportunity to buy stock in XL, Inc. The directors

decide that, instead of Wonder buying the stock, the directors will buy it. Yvon, a Wonder

shareholder, learns of the purchase and wants to sue the directors on Wonder’s behalf.

2A. Nico is Omega Corporation’s majority shareholder. He owns enough stock in

Omega that if he were to sell it, the sale would be a transfer of control of the firm.

Discuss whether Nico owes a duty to Omega or the minority shareholders in selling his

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ANSWERS TO BUSINESS SCENARIOS

AT THE END OF THE CHAPTER

40-1A. Conflicts of interest

Various state statutes contain different standards for contracts made between two corporations

when a director of one corporation has a material interest in the other. In general, however, the

courts will uphold these contracts providing that:

(a) The contract was fair and reasonable to the corporation at the time the contract

40-2A. Liability of directors

Directors are personally answerable to the corporation and the shareholders for breach of their

duty to exercise reasonable care in conducting the affairs of the corporation. Reasonable care

is defined as being the degree of care that a reasonably prudent person would use in the

ANSWERS TO BUSINESS CASE PROBLEMS

AT THE END OF THE CHAPTER

40–3A. Fiduciary duty of officers

Arizona Tile supplied materials to Designer Surfaces. The statute regarding the suppliers of

materials created an obligation on Designer’s part to treat funds it obtained for the sale of

40–4A. BUSINESS CASE PROBLEM WITH SAMPLE ANSWER—Rights of shareholders

40–5A. Duty of loyalty

Dweck breached the fiduciary duty of loyalty that a director and officer owes to his or her

corporation—in this case, Kids. The essence of the duty of loyalty is the subordination of self-

40–6A. Duties of majority shareholders

Ron may arguably have been the victim of a freeze out by Bill and Gertrude. A majority

shareholder is sometimes regarded as having a fiduciary duty to the corporation and the

minority shareholders. This occurs when a few shareholders acting together own enough shares

to exercise control over the corporation. A breach of fiduciary duty by those who control a close

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40–7A. Business judgment rule

No, the Songers are not personally liable for Country’s failure to complete its contract with A

Westside Storage. A hallmark of the corporate form of business organization is that

shareholders are not personally liable for the debts of the corporation. If the corporation fails, the

40–8A. Rights of shareholders

Clifford can pursue his action on the companies’ behalf against Frederick. When a corporation is

harmed by the actions of a director or officer, the other directors can bring a suit in the name of

the company against that party. If the directors do not bring a suit, the shareholders can do so

filing what is known as a shareholder’s derivative suit.

CHAPTER 40: CORPORATE DIRECTORS, OFFICERS, AND SHAREHOLDERS 9

40-9A. A QUESTION OF ETHICS—Duties of directors and officers

(a) Reuther, as a director, was entitled to full access to all financial information. As a

shareholder, Reuther could also have access to the information. The court extrapolated that “[t]o

hold otherwise would put directors in the untenable position of being legally and personally

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around.”

(b) The court characterized that JES’s actions as “duplicitous and self serving. On

more than one occasion, JES has taken a liberal view of his power as president at the expense

ANSWERS TO LEGAL REASONING GROUP ACTIVITY QUESTIONS

AT THE END OF THE CHAPTER

40–10A. Shareholders’ duties

(a) These parties owed fiduciary duties to each other, which they breached by

all of the proceeds from the sale of the casino.

(b) Griffith owed $58,447.20 to Weintraub for his 49 percent share of the proceeds

(c) Of course, Weintraub violated his ethical duties to Griffith and to their corporation