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C H A P T E R 20
DIRECTORS, OFFICERS, AND
CONTROLLING SHAREHOLDERS
Directors and officers are agents of the corporation and, along with controlling shareholders, owe
a fiduciary duty of care and loyalty to the corporation and shareholders. This chapter examines
I. THE BUSINESS JUDGMENT RULE AND THE DUTY OF CARE.
A. Informed Decision.
CASE 20.1 Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985). Van Gorkom,
chairman Trans Union, asked the CFO to work out a price per
share for Trans Union stock. The CFO came up with a cash-flow
1. Reliability of Officers’ Reports. Not every statement of an officer can be
relied upon in good faith, and no statement is entitled to blind reliance.
2. Reliability of Experts’ Reports. Directors have a duty to pursue
B. Reasonable Supervision. Directors must exercise supervision over corporate
operations.
CASE 20.2 In re Citigroup Inc. Shareholder Derivative Litigation, 946 A.2d
106 (Del. Ch. 2006). During the recent housing crisis Citigroup
left itself exposed to the sub-prime mortgage and housing crisis
BAGLEY, MANAGERS AND THE LEGAL ENVIRONMENT 7TH ED—INSTRUCTOR’S MANUAL
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C. Responsibility for SEC Filings. Sarbanes-Oxley Act requires directors and
officers to conduct a full and informed review of the information contained in the
final draft of the SEC filings.
E. Statutory Limitations on Directors’ Liability for Breach of Duty of Care.
1. Delaware’s Statute does not limit or eliminate director liability of
II. DUTY OF GOOD FAITH includes proactive stewardship and active oversight, especially
in relation to corporate compliance with law.
CASE 20.3 In re Abbott Laboratories Derivative Shareholders Litigation, 325 F.3d
795 (7th Cir. 2003). Abbott Labs had entered a consent decree to pay
III. DUTY OF LOYALTY. Directors and managers must subordinate their interests to those of
the corporation and its shareholders.
A. Corporate Opportunities. Neither directors nor managers may take advantage of
an opportunity that rightfully belongs to the corporation.
V. DUTIES IN THE CONTEXT OF TAKEOVERS, MERGERS, AND ACQUISITIONS.
A. The Company’s Intrinsic Value, more than the market price of a share of
company’s stock.
CHAPTER 20 DIRECTORS, OFFICERS, AND CONTROLLING SHAREHOLDERS
D. Takeover Defenses. The business judgment rule creates a powerful presumption
in favor of actions taken by the directors to prevent a merger or hostile takeover.
1. Unocal Proportionality Test. BJR applies to takeover defenses, provided
E. Duty to Maximize Shareholder Value under Revlon. Directors must ensure the
best price for shareholders when a company is in “Revlon mode”, which means a
change of control, not a strategic alliance such as the Paramount – Time Warner
case.
1. When Is A Company in Revlon Mode?
E. Deal Protection Devices are part of friendly mergers and can be defensive moves
to prevent merger.
1. No-Talk Provisions.
CASE 20.4 Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914
(Del. 2003). NCS became insolvent due to government
reimbursements and various third party providers.
Omnicare offered to buyout NCS and later, another
VI. ALLOCATION OF POWER BETWEEN THE DIRECTORS AND THE SHAREHOLDERS.
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A. “Poison Pills” (Shareholder Rights Plans). The board may pass a resolution that
makes any takeover unapproved by the directors prohibitively expensive for the
new corporation.
CASE 20.5 Air Products & Chemicals, Inc. v. Airgas, Inc., 16 A.3d 48 (Del.
Ch. 2011). Air Products sought a hostile takeover of Airgas
B. Protecting the Shareholder Franchise and the Blasius Standard of Review.
VII. DUTY OF DIRECTORS TO DISCLOSE PRELIMINARY MERGER NEGOTIATIONS.
Managers planning a buy-out (MBO) face a real conflict of interest about whether to
VIII. EXECUTIVE COMPENSATION.
A. Equity Compensation Agreements. As companies look to move away from stock
option programs, there are at least three alternatives.
1. Stock Options. Give optionee the right to buy a certain number of shares
at a fixed price for a fixed number of years, but usually no more than ten
years (the exercise period).
2. Restricted Stock Plans provide employees the right to purchase a limited
amount of shares, yet take possession later. Stock received in connection
B. SEC Disclosure Requirements.
CHAPTER 20 DIRECTORS, OFFICERS, AND CONTROLLING SHAREHOLDERS
E. Key Principles Related to Compensation: Strong, independent compensation
committee, executive compensation should have a significant performance based
IX. DUTIES OF CONTROLLING SHAREHOLDERS. A controlling shareholder might owe a
fiduciary duty to the other shareholders, and always owe duty to minority shareholders.
A. Sale of Control. Controlling shareholders normally have a right to derive a
premium from the sale of a controlling block of stock, however, controlling
shareholders must allow minority shareholders to participate in the financial
benefits.
CASE 20.6 Jones v. H. F. Ahmanson & Co., 460 P.2d 464 (Cal.1969). The
B. Freeze-outs. A majority shareholder may freeze out the minority, so long as the
transaction is fair and is designed to maximize shareholder value. Weinberger v.
UOP, Inc., 457 A.2d 701 (Del. 1983).
THE RESPONSIBLE MANAGER: TEACHING SUGGESTIONS.
1. How would the legally astute manager carry out the following fiduciary duties?
• Show an undivided loyalty.
• Exercise good faith with no conflict of interest.
• Act with the care a reasonable person would use to manage their own property.
BAGLEY, MANAGERS AND THE LEGAL ENVIRONMENT 7TH ED—INSTRUCTOR’S MANUAL
2. Discuss the pros and cons of the business judgment rule, and under what conditions
directors should be held personally responsible for the financial ruin of companies such Freddie
Mac, Fannie Mae, Lehman Brothers, and AIG?