#39;s reports. Disabilities may be considered in determining whether the dir has met the standard of care.
c) Duty of Loyalty - a catch-all duty designed to prevent unfairness - the duty to act in good faith (BJR applies). Application:
1) Self-dealing transactions
I) Common Law:
(1) early absolute prohibition against self-dealing renders transactions void or voidable;
(2) permissive self-dealing: dirs and officers may contract with the corp if (a) done in "strictest good faith."; (b) with full disclosure; and (c) consent of "all concerned."
[1] - burden of proof is on the dir to establish good faith, honesty & fairness;
[2] - courts weigh self-dealing transactions with "Closest scrutiny"
(3) self-dealing prohibition also applies to intercorporate transactions where dirs are common.
ii) Statutory (example):
(1) quasi-safe harbor approach (Iowa statute) - transaction is not void or voidable because of dirs 'interest, if either:
[1] - interest is disclosed and approval is made without counting the vote of the interested dir.
[2] - interest is disclosed to shs and shs authorize
[3] - transaction is fair and reasonable
(2) Note - dir must still establish that he acted in good faith, honesty, and fairness
2) Domination of subsidiary by parent - courts look at the transaction to see if self-dealing has occurred. Example (Sinclair Oil):
I) declaration of dividends shared pro rata was NOT self-dealing; BJR applies
ii) contract between parent and sub was self-dealing; apply intrinsic fairness test
3) Manager's compensation:
I) Ordinary corporations - conflicts are inevitable but all firms need to set compensation. The burden of proof is placed on challengers as a matter of convenience.
ii) Close corporations - the income generated by the firm may be diverted to salaries, so there is an option for self-dealing by the parties in control to take tax-advantaged compensation in the form of salaries (taxed once) as opposed to dividends (taxed twice).
d) Statutory Duties and Liabilities - in addition to general duty of care, federal and state laws also impose certain duties and liabilities, eg, registration requirements under the Securities Act of 1933, liability for rule 10b-5 violations, liability for illegal dividends. Some statutes also impose criminal liability on corporate managers for unlawful corporate actions.
C.OFFICERS
1.ELECTION--officers are usually elected by the board of dirs. Some statutes permit election of officers by shs. p> 2.AUTHORITY OF CORPORATE OFFICERS (liability of corp to outsiders) - only authorized officers can bind the corp. Authority may be: actual (expressed in bylaws or by valid board resolution), apparent (corp gives third parties reason to believe authority exists), or power of position (Inherent to position). ...
