Corporate Governance Fiduciary Duties & Legal Liability 2 — Questions and Answers
Question 1: The Caremark decision established that directors have an oversight duty that requires them to:
- Personally audit financial statements each quarter
- Implement and monitor a system of controls to detect legal violations (Correct answer)
- Hire an independent compliance officer reporting only to shareholders
- Conduct annual site visits to all company facilities
Correct answer: Implement and monitor a system of controls to detect legal violations
Caremark held that directors must ensure a reasonable information and reporting system exists so they can monitor corporate compliance.
Question 2: Which of the following best describes an 'exculpation clause' in a corporate charter?
- A provision requiring directors to carry personal liability insurance
- A clause eliminating or limiting director monetary liability for breaches of the duty of care (Correct answer)
- A requirement that the corporation indemnify shareholders for merger losses
- A board resolution removing a director for cause
Correct answer: A clause eliminating or limiting director monetary liability for breaches of the duty of care
Exculpation clauses, permitted under statutes like Delaware § 102(b)(7), shield directors from personal monetary liability for duty-of-care breaches.
Question 3: Corporate indemnification of directors and officers typically covers legal expenses when they are sued in connection with their corporate role, UNLESS the director or officer:
- Opposed the board majority on a vote
- Acted in bad faith or for personal profit at the corporation's expense (Correct answer)
- Failed to attend more than 25% of board meetings
- Disclosed board discussions to a major institutional investor
Correct answer: Acted in bad faith or for personal profit at the corporation's expense
Indemnification is generally unavailable when the director or officer acted in bad faith or gained improper personal benefit at the corporation's expense.
Question 4: Under Delaware law, which party bears the burden of proof when a plaintiff challenges a board decision protected by the Business Judgment Rule?
- The corporation
- The plaintiff shareholder (Correct answer)
- The independent directors
- The lead underwriter
Correct answer: The plaintiff shareholder
When the Business Judgment Rule applies, the plaintiff bears the burden of rebutting the presumption that directors acted in an informed, good-faith manner.
Question 5: A derivative lawsuit in corporate law is one filed by:
- The SEC on behalf of defrauded investors
- A shareholder on behalf of the corporation to remedy a wrong done to the corporation (Correct answer)
- The board against a departing executive for breach of contract
- An unsecured creditor seeking recovery of unpaid obligations
Correct answer: A shareholder on behalf of the corporation to remedy a wrong done to the corporation
In a derivative suit, the shareholder acts as a proxy for the corporation, seeking recovery for a harm suffered by the corporation itself.
Question 6: Which of the following scenarios most clearly constitutes a breach of the duty of care?
- A director votes to approve an acquisition that later loses value
- A director approves a major merger without reviewing any financial data or management reports (Correct answer)
- A director relies on an expert fairness opinion before approving a transaction
- A director misses one board meeting per year
Correct answer: A director approves a major merger without reviewing any financial data or management reports
Approving a major transaction without reviewing any relevant information fails the informed decision-making standard required by the duty of care.
Question 7: The concept of 'entire fairness' review in Delaware corporate law applies most directly when:
- A board fails to hold an annual meeting on schedule
- A conflicted transaction is approved without adequate independent oversight (Correct answer)
- Management bonuses exceed peer group benchmarks by 20%
- A minority shareholder accumulates more than 10% of shares
Correct answer: A conflicted transaction is approved without adequate independent oversight
Entire fairness review—requiring fair dealing AND fair price—applies when a controlling shareholder or conflicted directors push through a self-interested transaction.
Corporate Governance Fiduciary Duties & Legal Liability 2
The Caremark decision established that directors have an oversight duty that requires them to: