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Model Answers Chap 8 Corporation Questions

Model Answers Chap 8 Corporation Questions - MODEL ANSWERS...

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MODEL ANSWERS: CHAPTER 8 CORPORATION QUESTIONS 1. Decision in favor of Brown. An officer or director of a corporation is not necessarily personally liable for loss sustained by the corporation as a result of the exercise of poor or mistaken business judgment. The business judgment rule protects officers and directors from personal liability if they have no interest in the subject (i.e. Board acts in good faith), are informed with respect to the subject (i.e. board acts with the care of an ordinarily prudent person in a like position under similar circumstances) and rationally believe that the transaction is in the best interest of the corporation. In this case, it appears that Brown acted in good faith as he had no conflict of interest or self interest in the transaction. It also appears that he exercised due care (i.e. the care that an ordinarily prudent person would exercise) since he was advised “on good authority” that the superhighway was coming and he shared the facts, as he knew them, with the board. Finally, Brown acted in a manner reasonably believed to be in the best interests of the corporation since building a motel near a superhighway would appear to be a good idea for a company engaged in the business of building motels. As a result, the business judgment rule will protect Brown from personal liability. [Note: some might argue that Brown did not exercise the care of an ordinary prudent person since there is no indication that he conducted any independent research or really based his recommendation on anything other than what might be considered a rumor. In this case, Brown would not have exercised the care of an ordinarily prudent person and would not be protected by the business judgment rule.] 4. (a) Judgment for D Company against X Corporation. The general rule is that a contract between corporations with common directors is not voidable by either corporation even if the interlocking directors constitute a majority of the board of the company challenging the contract, provided that the contract is fair and reasonable. Consequently, if D Company can establish that the contract is fair, most courts would deny rescission of the original contract to purchase the steel from D Company.
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