Business Organizations & Corporate Law Flashcards

In Smith v. Van Gorkom, directors approved a merger after a two-hour meeting with no valuation study. The Delaware Supreme Court held them liable because:

Answer: They breached the duty of care by failing to make an informed decision (gross negligence)

The business judgment rule did not protect the board because it was grossly negligent in informing itself.

Under DGCL §144, a transaction between a corporation and one of its directors is NOT voidable solely because of the conflict if:

Answer: After full disclosure, it is approved by a majority of disinterested directors

Section 144 safe harbors include informed approval by disinterested directors, informed approval by disinterested shareholders, or fairness to the corporation.

Under Broz v. CIS, a director who takes a business opportunity without first presenting it to the board:

Answer: Is not automatically liable; presentation is a safe harbor, not a requirement

Broz held that formal presentation to the board is not required, though it provides a safe harbor.

Under Caremark and Stone v. Ritter, directors face oversight liability when they:

Answer: Utterly fail to implement any reporting system or consciously ignore red flags

Oversight liability requires bad faith, meaning a sustained or systematic failure to monitor, which makes it a duty of loyalty issue.

A Delaware charter provision under DGCL §102(b)(7) may eliminate a director's monetary liability for:

Answer: Breach of the duty of care

Exculpation covers duty of care violations only; loyalty breaches, bad faith, unlawful distributions, and improper personal benefits are excluded.

Under Revlon, once a sale or breakup of the company becomes inevitable, the board's duty shifts to:

Answer: Getting the best price reasonably available for shareholders

In Revlon mode, directors act as auctioneers who must maximize short-term shareholder value.

Under Unocal and Unitrin, a board's defensive measure against a hostile bid will be upheld if:

Answer: The board reasonably perceived a threat and the response is neither preclusive nor coercive and falls within a range of reasonableness

Unocal's enhanced scrutiny requires a reasonable threat and a proportionate response, which Unitrin clarified must not be draconian.