Corporate Governance Fiduciary Duties & Legal Liability 1 — Questions and Answers
Question 1: Which fiduciary duty requires corporate directors to act in the best interests of the corporation and its shareholders rather than pursuing personal gain?
- Duty of care
- Duty of loyalty (Correct answer)
- Duty of disclosure
- Duty of obedience
Correct answer: Duty of loyalty
The duty of loyalty requires directors to prioritize the corporation's and shareholders' interests over their own personal interests.
Question 2: Under the Business Judgment Rule, courts will generally defer to a board decision if the directors acted on an informed basis, in good faith, and:
- With unanimous board approval
- In the honest belief it was in the corporation's best interest (Correct answer)
- After consulting outside counsel
- Following a shareholder vote
Correct answer: In the honest belief it was in the corporation's best interest
The Business Judgment Rule protects directors who act in good faith with the honest belief their decision serves the corporation's best interests.
Question 3: A director who learns of a corporate opportunity and pursues it personally without offering it to the corporation first most likely violates which duty?
- Duty of care
- Duty of confidentiality
- Duty of loyalty (Correct answer)
- Duty of disclosure
Correct answer: Duty of loyalty
Usurping a corporate opportunity for personal benefit is a classic breach of the duty of loyalty.
Question 4: What standard does the duty of care typically require of corporate directors?
- The highest possible standard of perfection
- The same care a reasonably prudent person would exercise under similar circumstances (Correct answer)
- The standard applied to professional fiduciaries such as trustees
- Zero-tolerance for any business loss
Correct answer: The same care a reasonably prudent person would exercise under similar circumstances
The duty of care applies an objective, reasonably prudent person standard to director conduct in similar circumstances.
Question 5: Which doctrine allows courts to review director decisions with heightened scrutiny when a board takes defensive measures in response to a hostile takeover?
- Business Judgment Rule
- Unocal doctrine (Correct answer)
- Revlon doctrine
- Caremark doctrine
Correct answer: Unocal doctrine
The Unocal doctrine requires boards to demonstrate a reasonable threat to corporate policy and that defensive measures are proportionate to that threat.
Question 6: Under the Revlon doctrine, a board's primary obligation shifts to maximizing short-term shareholder value when:
- Annual earnings decline two consecutive quarters
- The company enters a change-of-control transaction (Correct answer)
- A shareholder activist acquires a 5% stake
- The CEO is replaced by an outsider
Correct answer: The company enters a change-of-control transaction
The Revlon doctrine triggers when a company is up for sale, requiring the board to act as an auctioneer and maximize shareholder value in the transaction.
Question 7: A director who holds a material financial interest in a contract being considered by the board should FIRST:
- Vote against the contract to avoid the appearance of bias
- Disclose the conflict and recuse from the vote (Correct answer)
- Resign from the board before the vote
- Ask the CEO to decide without board involvement
Correct answer: Disclose the conflict and recuse from the vote
Proper conflict-of-interest management requires full disclosure to the board and recusal from the related vote.
Corporate Governance Fiduciary Duties & Legal Liability 1
Which fiduciary duty requires corporate directors to act in the best interests of the corporation and its shareholders rather than pursuing personal gain?