1. Duty of Care
It requires these corporate officers and directors to act with the care of an ordinarily prudent person in the same or similar circumstances
a) Affirmative decision of the board - Business Judgment Rule: When a informed business decision is made by independent and disinterested directors with good faith and believe that the decision is in the best interest of the corporation, the decision constitute a valid business judgment and the court will not second-guess it. Kamin v. American Express
a.i. What is good faith? Stone v Ritter: Bad faith exist:
a.i.1. where the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation
a.i.2. where the fiduciary acts with the intent to violate applicable positive law
a.i.3. where fiduciary intentionally fails to act in the face of a known duty to act, demonstrating conscious disregard for his duties
*Note that duty of good faith is actually within the scope of duty of loyalty.
a.ii. What happen if a decision is not protected by the business judgment rule? In these duty of care cases, court has a presumption of the application BJR, which creates presumption of good faith. P must prove that presumption of BJR does not apply. If plaintiff rebutted that presumption, the defendants have to prove that the challenged transactions were entirely fair to the corporation - “Entire fairness standard”. In re Walt Disney Co. Derivative Litigation
a.iii. In a “change of control” circumstance, the court will use a heightened BJ review. Smith v. Van Gorkom (Delaware 1985) The court in Van Gorkom requires the board to be adequately informed rather than just reasonably informed (as compared to Disney).
a.iv. When the decision is illegal: The business judgment rule will not immunize the decision of a board that deliberates with the utmost care to authorize an action that they know to be illegal. Duty to obey the law is a judicially created duty on the overall fiduciary duty structure. Miller v. AT&T (3rd Circuit 1974)
a.v. DGCL §141(e) Directors are allowed to rely on info, opinions, reports and statements presented to the corporation by its officers, employees, or outside experts, so long as that reliance is in good faith.
b) Board’s failure to act: Boards are liable for their inaction too, they have monitoring duty and response duty.
b.i. Francis v. United Jersey Bank (NJ 1981)
b.i.1. A director’s duty: should acquire at least a rudimentary understanding of the business of the corporation, regularly review financial documents, generally monitor the corporation’s affairs and policies, and when he detected problems, take action.
b.i.2. Does the failure to act result in the loss? Causation may be inferred where it can be concluded that the failure to act would produce a particular result, and that result has followed.
b.ii. Graham v. Allis-Chalmers Manufacturing Co. Directors duty to install controls to prevent wrong-doing in the company only exist when there is sufficient "red flags". (Developed by Caremark)
b.iii. In re Caremark International Inc. Derivative Litigation (Delaware 1996)
b.iii.1. Since relevant and timely information is an essential predicate for satisfaction of the board's supervision and monitoring role, Boards must assure themselves that information and reporting systems exist in the organization that are reasonably designed to provide to management/board timely, accurate information sufficient to allow management and board to make informed judgments regarding business performance and compliance with law.
b.iii.2. The level of detail appropriate for such an info system is a matter of business judgment.
b.iii.3. Only a sustained or systemic failure of the board to exercise oversight will establish the lack of good faith that’s a necessary condition to liability.
b.iv. Stone v. Ritter (Delaware 2006) endorsed and clarified Caremark. The conditions predicate for director oversight liability