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ALTERNATE CASE PROBLEM ANSWERS
CHAPTER 40
CORPORATE DIRECTORS,
OFFICERS, AND SHAREHOLDERS
40-1A. Inspection rights
The court denied the motion to dismiss, but after the defendants gave Hagen twelve boxes of
corporate records—two years after Hagen’s initial request—the court issued a summary
judgment in the defendants’ favor, concluding in part that Hagen’s request to inspect DSI’s
records had not been specific enough. Seeking damages, Hagen appealed to a state inter-
mediate appellate court, which reversed this judgment and remanded the case. The chief
question on appeal was the specificity of Hagen’s request. The appellate court held that this was
40-2A. Duty of loyalty
The court found that Sullivan knew he was being disloyal to Digital and that he actively
concealed this disloyalty. Specifically, Sullivan “affirmatively advised ASR not to work with
Digital Commerce in May 2000. Then, a few months later, while still employed as President of
Digital Commerce, [Sullivan] solicited ASR’s business for himself.” The court pointed out that the
“[a] corporate officer or director is under a fiduciary obligation not to divert a corporate business
B-2 APPENDIX B: ALTERNATE CASE PROBLEM ANSWERS—CHAPTER 40
40-3A. Duty of care
The trial court pierced the veil of the corporation to hold Mullins liable, and Mullins appealed.
The appellate court affirmed the decision of the trial court, holding that knowledge of the
advertising account gained by Mullins in his capacity as director of the FSG was sufficient to put
him on inquiry, so that he was aware of the newspaper’s claim against FSG for purposes of
piercing the corporate veil, and any knowledge imputed to Mullins in his capacity as director
could be charged to him as an individual. The court explained that “when a person has notice of
40-4A. Duty of loyalty
The Delaware state trial court held that Broz breached his fiduciary duty because he failed to
present to the entire CIS board the opportunity to buy the Michigan license. On appeal, the
Delaware Supreme Court reversed. The state supreme court pointed out first that “Broz
became aware of the [license] opportunity in his individual and not his corporate capacity.” Also,
40-5A. Business judgment rule
The court concluded in part that Wittman failed to state a claim for breach of the duty of care.
The court stated that she did not “allege facts sufficient to overcome the presumption of
correctness afforded * * * by the Business Judgment Rule.” Also, “there was, as a matter of
40-6A. Fiduciary duty of directors
The fiduciary obligation of undivided loyalty imposed on directors and officers precludes them
from appropriating a business opportunity that belongs to their corporation. A corporate
opportunity exists when a proposed activity is reasonably related to the corporation's business
and is one in which the corporation has the capacity to engage. Here, PPI had a corporate
40-7A. Business judgment rule
The court ruled in favor of the defendants. Pace and Fuentez appealed to a state intermediate
appellate court, which affirmed the judgment of the lower court. The appellate court explained
that to bring a derivative suit, “a shareholder must show that the board of directors’ refusal to act
was governed by something beyond unsound business judgment. Under the business judgment
40-8A. Duties of majority shareholders
The court found that Alex had engaged in fraud and Atlas had engaged in conduct that was
fraudulent, oppressive, and unfairly prejudicial toward John. Among other relief, a buy-out was
ordered. On appeal, a state intermediate appellate affirmed this result. On further appeal, the
B-4 APPENDIX B: ALTERNATE CASE PROBLEM ANSWERS—CHAPTER 40
40–9A . Duties of directors and officers
Directors and officers are fiduciaries of their corporations and owe legal and ethical duties to
their firms and the shareholders, including the duty of care and the duty of loyalty. Among other
things, these duties require directors and officers to act in good faith, to exercise the care that a
40-10A. A QUESTION OF ETHICS
1. All directors of a corporation owe their primary fiduciary duty to the corporation.
Consequently, they must use their good faith judgment to make decisions that they believe will
2. Corporate directors cannot serve two masters at the same time if they expect to guide
the affairs of the corporation competently. By forcing directors to ignore private agreements that
3. If several incompetent directors were attempting to exclude other, more competent
directors from actively managing the corporation’s affairs, then it might be in the interests of the
