Spring 2010 Business Law and the Legal Environment - Week 14

Spring 2010 Business Law and the Legal Environment - Week...

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Business Law and the Legal  Environment Week 14 Spring 2010
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Liability Issues Business Judgment Rule = Directors and Officers liability Piercing the Corporate Veil = Shareholder liability
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Types of Lawsuits (Shareholder) Derivative Lawsuits = brought by shareholders or directors to remedy a wrong to the corporation Direct Lawsuits = only where one’s own rights were violated Ex. Not allowing a shareholder to inspect the company books
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Business Judgment Rule If a manager has complied with the BJR, the court will not hold them personally liable for any harm their decision has caused the company, nor will the court rescind the manager’s decision. If a manager violates the BJR, then she must prove to the court that her decision was fair to the shareholders Duty of Loyalty Managers (directors, officers) must act without a Conflict of Interest. Duty of Care Managers must act with the care that an ordinarily prudent person would take in a similar situation, and In a manner they reasonably believe to be in the best interests of the corporation.
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Duty of Loyalty is Violated in the event of: Self Dealing by the Manager Ex. Manager of Corp. 1 purchases supplies for Corp. 1, from Corp. 2 which manager is also a part owner Manager Usurping a Corporate Opportunity
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Duty of Care is Violated if: Did not act with the same care an ordinary person would take in a similar situation No Rational Business Purpose Ex. Chicago Cubs: lights at the stadium Decision was Illegal Ex. Bribes to silence complaints Uninformed Decision
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Test Example Tebow is on the board of directors of Jump Pass Corp. Jump Pass is looking for a warehouse to purchase. Tebow owns a warehouse that would accommodate Jump Pass. In order for Tebow to sell his warehouse to Jump Pass:
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Test Example Answer A. the transaction must be fair to both Tebow and Jump Pass. B. he must bring the issue before the disinterested members of the board of directors for their approval of the transaction. C. he must resign his position on the board of directors of Jump Pass before any negotiations for the warehouse begin. D. a court must review the opportunity to determine its favorability.
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In re The Walt Disney Co. Derivative Litigation Michael Eisner (CEO) exclusively negotiated the terms of Michael Ovitz’s contract for President of The Walt Disney Co. Compensation Committee approved, as did the whole Board of Directors, Ovitz’s compensation and severance package ($140M) with little to no review of the terms No fault termination as secretly negotiated between Eisner and Ovitz to save face and allow Ovitz to receive the severance package Shareholders alleged Board breached its Fiduciary Duty by not reviewing the terms of Ovitz’s employment agreement, Ovitz breached his Fiduciary Duty as a Director to the Co. by not reporting his leaving to the Board until after Eisner and Ovitz had secretly negotiated beneficial terms at the expense of the Co. Walt Disney Co. and Ovitz filed a MTD arguing the BJR which the
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Spring 2010 Business Law and the Legal Environment - Week...

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