Two situations often result in a duty of loyalty on the part of the director or officers: (1) contracts with the corporation and (2) business opportunities (see Figure 25.3 „Common Conflict Situations”). In a battle for control of a company, directors (especially „internal” directors who are employees of the company, such as officers) often have an inherent vested interest in maintaining their positions, which can lead them to block mergers that shareholders want and that may be in the best interest of the company. As a result, the Delaware courts have modified the usual presumption of commercial judgment in this situation. In Unocal Corp. v. Mesa Petroleum, Unocal Corp. v. Mesa Petroleum, 493 A.2d 946 (Del. 1985). For example, the Court found that directors who use a defence mechanism „must demonstrate that they had reasonable grounds to believe that there was a threat to the policy and effectiveness of the company . They meet this burden by conducting good faith and reasonable investigations. It is clear that the commercial judgment rule does not protect all decisions of the House.
The Unocal court developed a test for the board: directors can only work to prevent a takeover if they can prove a threat to company policies and that any defensive measures taken to prevent the takeover were appropriate and proportionate to the magnitude of the threat. The Unocal test was amended by requiring that before a court intervenes, it must be established that a counsel`s actions were coercion, a step backwards towards the rule of commercial judgment. Unitrin v. American General Corp., 651 A.2d 1361 (Del. 1995). Critics have attacked constituency articles for two main reasons: first, they replace a clear principle of conduct with an amorphous one, as they provide no guidance on how directors should weigh the interests of different groups in a corporation. Second, they make it difficult for shareholders to monitor the performance of a company`s board of directors. Measuring decisions in relation to the sole objective of maximizing profit is much easier than in relation to the subjective objective of „balance” a multitude of competing interests. Constituency articles contradict the concept of shareholders as owners and the fiduciary duties owed to them, thereby weakening shareholder power. However, with many states now having constituency status, it is reasonable to expect that the traditional doctrine that puts shareholder interests first will yield even as shareholders challenge new directors` decisions that favor communities, employees, and others who have a significant interest in the welfare of the companies with which they deal. For a more detailed discussion of constituency laws, see „Corporate Governance and the Sarbanes-Oxley Act: Corporate Constituency Statutes and Employee Governance.” Brett H.
McDonnell, „Corporate Governance and the Sarbanes-Oxley Act: Corporate Constituency Statutes and Employee Governance,” William Mitchell Law Review 30 (2004): 1227. [The due diligence argument] is best understood in light of the assumption that the Director`s actions are reviewed in accordance with the standard of business judgment. Our law assumes that „the directors of a corporation acted in an informed decision, in good faith and with an honest belief that the actions taken were in the best interests of the corporation.” These presumptions may be rebutted if the plaintiff proves that the directors breached their fiduciary duty of care or loyalty or acted in bad faith. If proven, the onus is on the defendant directors to prove that the impugned act or transaction was entirely fair to the corporation and its shareholders. Managers have a duty of loyalty and due diligence to the company. A contract between a director and the Corporation is voidable unless it is fair to the Corporation or all details have been disclosed and the uninterested directors or shareholders have consented thereto. Each director or officer is required to inform the other directors of any business opportunities affecting the Corporation and may only act personally if he or she has received approval. The duty of care is the duty „to act with the care that a normally prudent person in a similar situation would exercise in similar circumstances.” Other fiduciary duties have also been recognized, and the constituency articles allow the corporation to consider factors other than shareholders in decision-making. Shareholders may bring derivative actions for alleged breach of their fiduciary duties. The tasks have been extended.
For example, if the company is sold, directors have a duty to maximize shareholder value. Oversight, good faith and transparency have been applied. Under U.S. law, the concept of ultra vires may still exist in some States in the following types of activities: The situation was changed by the Companies Act of 1985, which largely abolished the doctrine of commercial companies. The situation is now regulated by sections 31 and 39 of the Companies Act 2006, which also severely limit the applicability of ultra vires in company law, although it can still apply to charities and a shareholder can only apply for an injunction in advance to prevent an act known as ultra vires. If other types of entities, such as government agencies, also take actions that are beyond their legal powers, their actions can also be characterized as ultra vires acts. What about the care itself? What kind of care should a normally prudent person give in each situation? Unlike the standard of care, which may be different, the care itself has certain requirements. At least the director needs to be careful.
He must attend meetings, receive and process information informing him of matters requiring action by the board of directors and monitor the performance of those to whom he has delegated the task of directing the company. Of course, documents can be misleading, reports can be bizarre, and information from self-serving management can be distorted. To what extent should suspicions be raised? Section 8.30 of the RMBCA attributes to directors the need to play detective when information, including financial data, is obtained in an apparently reliable manner from officers or employees, or experts such as lawyers and accountants. This way, the director does not have to speak to another lawyer once he or she has received financial information from a competent lawyer. In some cases, an officer`s liability may be representative. The Supreme Court upheld the conviction of a CEO who had no personal knowledge of his company`s violation of regulations issued by the Food and Drug Administration. In this case, a senior manager was held strictly liable for his company`s violation of the regulations, whether or not he had knowledge of the acts (see Chapter 6 „Criminal Law”). United States v. Park, 421 U.S. 658 (1975). This contrasts with the general rule that a person must or must know of a violation of the law to be liable. Strict liability does not require knowledge.
Thus, the directors of a company can be held criminally liable, even if they did not directly participate in the illegal activities. Of course, employees who are directly responsible for violations of the law can also be held liable. In short, violations of tort, criminal law and regulatory law can have negative consequences for both the company and its employees. Suppose an incorporated lunch club refuses to admit women as club members or guests. What happens if this action is ultra vires? Croix v. The Midtown Club, Inc. (see section 27.5.1 „Ultra Vires Acts”) addresses this issue. An ultra vires act is not necessarily punishable or illegal. However, every crime is ultra vires in a sense, because a company never has the legal authority to commit crimes or misdemeanors.
They raise particular problems, which we now turn to. Connecticut has codified a member`s customary right to take action against its corporation or directors in the event of ultra vires legislation. In fact, this was done specifically under the Non-Stock Business Corporations Act. In its certificate of incorporation, no power was conferred on the defendant company, but only one purpose, and therefore the only ancillary powers that the defendant would have at common law are those necessary to achieve its purpose, which is to serve lunch to its members. Since the club was not created for the purpose of having an all-male lunch club, it cannot be considered necessary for the club to have the implied power to exclude female members. Historically, all companies in the United Kingdom were subject to the doctrine of ultra vires, and any act that went beyond the objectives set out in a company`s articles of association was ultra vires and void. [3] This result was commercially unpleasant and led to the creation of companies with extremely broad and generic purpose clauses that allowed a company to engage in all sorts of business activities. [7] In the past, directors were expected to act as shareholder representatives without compensation.
Modern practice is to allow the board of directors to determine its own remuneration, unless otherwise specified in the articles of association.