Director Conflicts

Question 1

Director X owns a parcel of land. Director X is a member of the board of directors of Corporation C. Director X sells his land to Corporation C. That sale is:

1. illegal per se
2. a classic self-dealing transaction
3. a violation of Director X’s duty of care
4. a classic Caremark claim
5. ultra vires

Answer 1

2. a classic self-dealing transaction

Question 2

Delaware General Corporations Law Section 144 (Interested Directors; Quorum) creates a safe harbor for interested transactions if:

1. the material facts as to the director’s relationship or interest in the transaction are not disclosed or known to the board of directors and the board in good faith authorizes the transaction by the affirmative votes of a majority of the disinterested directors
2. the material facts as to the director’s relationship or interest in the transaction are not disclosed or known to the board of directors and the board in good faith does not authorize the transaction by the affirmative votes of a majority of the disinterested directors
3. the material facts as to the director’s relationship or interest in the transaction are disclosed or known to the board of directors and the board in good faith authorizes the transaction by the affirmative votes of a majority of the disinterested directors
4. the material facts as to the director’s relationship or interest in the transaction are disclosed or known to the board of directors and the board in good faith does not authorize the transaction by the affirmative votes of a majority of the disinterested directors
5. the material facts as to the director’s relationship or interest in the transaction are disclosed or known to the board of directors and the board in bad faith authorizes the transaction by the affirmative votes of a minority of the disinterested directors

Answer 2

3. the material facts as to the director’s relationship or interest in the transaction are disclosed or known to the board of directors and the board in good faith authorizes the transaction by the affirmative votes of a majority of the disinterested directors

Question 3

Under Subchapter F of the MBCA, a qualified director may be:

1. someone who does not have a conflicting interest in the transaction
2. someone who has no material relationship with a conflicted director
3. someone who was nominated or elected to the board by a conflicted director
4. someone who serves with the conflicted director on the board of another corporation
5. all of the above

Answer 3

5. all of the above

Question 4

A director who personally receives a benefit from the challenged transaction, a benefit that is important to him, and not generally shared with all shareholders of the corporation, is ________________; a director who is beholden to, and dominated by, another director is ________________.

1. interested; not independent
2. interested; independent
3. independent; disinterested
4. independent; interested
5. interested; disinterested

Answer 4

1. interested; not independent

Question 5

Under Subchapter F of the MBCA, a director conflicting interest transaction is immune from attack if it is authorized by:

1. a majority of the qualified directors
2. disinterested shareholders holding a majority of the shares
3. the court under a fairness standard
4. all of the above
5. 1 and 2

Answer 5

4. all of the above

Question 6

Subchapter F of the MBCA clarifies when self-dealing transactions are appropriate, in part by defining director conflicting interest transactions as transactions by the corporation in which the director

1. is a party
2. has a material financial interest
3. knows that a “related person” is a party had a material financial interest
4. all of the above
5. 1 or 2 only

Answer 6

4. all of the above

Question 7

A transaction in which a director has a conflict of interest implicates the director’s duty of:

Answer 7

loyalty

Question 8

Peter is both a director and an officer of SmallCo, Inc. SmallCo, Inc., is to be merged into BigCo, Inc. One of the terms of the merger agreement is that Peter will be an officer in BigCo. However, Peter is independently wealthy and a world famous mathematician and does not need or even really want the officer job in BigCo. Peter votes to recommend shareholder approval of the merger. Peter’s vote is challenged by a shareholder. Will the shareholder’s challenge likely to be successful?

1. No, because Peter had no disabling interest because the officer position in BigCo was not material to him
2. No, because Peter was interested in his fellow directors
3. Yes, because Peter had a disabling interest because the officer position in BigCo was not material to him
4. Yes, because Peter was independent of his fellow directors
5. 3 and 4 only

Answer 8

1. No, because Peter had no disabling interest because the officer position in BigBo was not material to him

Question 9

The corporate opportunity doctrine:

Answer 9

forbids a director, officer or managerial employee from diverting to himself any business opportunity that belongs to the corporation

Question 10

Assume A, B, C, D, E, F and G are all of the directors of Small Corp., a Delaware corporation. When Small Corp. is looking to open a new factory in Kansas, C suggests that Small Corp. purchase a large piece of property in Topeka. A, B, C, D, E, F and G together own the piece of property in question. The Small Corp. Board votes unanimously to approve the sale, and A, B, C, D, E, F and G share the $1 million profit on the sale of the Topeka property. The shareholders do not vote on the transaction. If this transaction is challenged, then…

1. The Board’s action will be held to be proper because it was grossly negligent or a waste of corporate assets.
2. The transaction will be void or voidable without further inquiry because it was not ratified by the shareholders.
3. The Board would have to show that the transaction was fair and reasonable.
4. The Caremark rule would require the Board to show that they paid the price that maximized shareholder value
5. C would be liable for taking the corporate opportunity

Answer 10

3. The Board would have to show that the transaction was fair and reasonable