Management Responsibilities Section 29.2

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation What You’ll Learn How to explain the business judgment rule (p. 633) How to explain the fairness rule (p. 637)

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation What You’ll Learn How to define the corporate opportunity doctrine (p. 637) How to distinguish between a member- managed LLC and a manager-managed LLC (pp )

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation Why It’s Important Understanding the duties of corporate managers will help you judge how they conduct their businesses.

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation Legal Terms business judgment rule (p. 633) fairness rule (p. 637) insider trading (p. 637) corporate opportunity doctrine (p. 637)

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation The Duties of Directors and Officers The Business Judgment Rule Duty of Loyalty and the Fairness Rule Insider Trading Rule Corporate Opportunity Doctrine Section Outline

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation Managing a Limited Liability Company Member-Managed LLCs Manager-Managed LLCs Fiduciary Duties Section Outline

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation Pre-Learning Question What are the duties of corporate managers?

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation A corporation’s directors and officers have a fiduciary relationship with the corporation. That is, they are in a position of trust in relation to the corporation and the shareholders. The Duties of Directors and Officers

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation As agents of the corporation, the officer’s fiduciary duties are similar to those of agents. The directors’ duties, however, resemble those of agents and employees. The Duties of Directors and Officers

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation Directors must perform their duties in good faith and in a manner they believe will be in the best interests of the corporation. The Duties of Directors and Officers

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation The Business Judgment Rule The Revised Model Business Corporation Act gives the following explanation of a corporate manager’s responsibilities.

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation The Business Judgment Rule A manager must act “in good faith, with the care an ordinarily prudent person in a like position would exercise and in a manner he reasonably believes to be in the best interests of the corporation.”

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation The Business Judgment Rule The courts have tried to clarify the concept of due care to encourage competent people to become and remain corporate directors and officers.

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation The Business Judgment Rule The court applies a formula known as the business judgment rule, which presumes that a board or a director acts with due care.

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation The Business Judgment Rule The courts defer to managers’ business decisions unless they find instances of fraud, a clear lack of good faith, an abuse of discretion, or an illegal act. Also, there must be no conflict of interest.

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation The Business Judgment Rule Some states have enacted antiliability statutes to limit the liability of directors, rather than officers, because the directors are not involved in the day-to-day activity of the corporation.

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation Duty of Loyalty and the Fairness Rule Managers have a duty of loyalty to their corporation. Directors and officers must not exploit their positions for personal gain at the expense of the corporation.

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation Duty of Loyalty and the Fairness Rule A manager’s duty of loyalty may be questioned if he or she has a personal interest in a particular business decision.

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation Disclosure and Approval Requirements However, just because a director or an officer has an interest in the transaction, the courts should not automatically invalidate the decision.

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation Disclosure and Approval Requirements The transaction may stand despite the personal profit if the manager discloses involvement in the decision, including all the terms and how much profit he or she made.

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation Disclosure and Approval Requirements If, after disclosure, the manager obtains the approval of the majority of the directors or the approval of the shareholders, then the decision will stand.

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation Fairness Rule If the manager has not met the disclosure or approval requirements, then he or she has the burden of proving that the decision is fair to the corporation. This requirement is called the fairness rule.

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation Fairness Rule The manager can try to show that the decision in question would have had the same conditions, prices, or terms if it had been made between two disinterested parties.

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation Insider Trading Rule An insider typically is a corporate director or officer who has information about a publicly traded corporation that is not available to the public.

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation Insider Trading Rule He or she may not buy or sell shares in the corporation if the transaction is based on “inside” information. Any such transaction is called insider trading and is unfair to the corporation and outsiders.

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation Corporate Opportunity Doctrine Another extension of the duty of loyalty is the corporate opportunity doctrine.

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation Corporate Opportunity Doctrine According to this doctrine, directors and officers cannot take a business opportunity for themselves if they have sure knowledge that the corporation would want to take that opportunity for itself.

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation 29.2 Duties of Corporate Managers Business judgment rule Fairness rule Insider Trading rule Corporate opportunity doctrine Decision stands if it is made (1) in good faith, (2) with due care within the law, and (3) in corporation’s best interest. The decision must be fair to the corporation because managers must remain loyal to the corporation. Manager must either reveal the information or refrain from trading on that information Manager must offer the opportunity to the corporation before taking for personal gain.

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation Which rule is being applied if the director or officer has the burden of proving that a business decision he or she made is fair to the corporation?

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation ANSWER Fairness rule.

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation Which rule is being applied when the courts defer to the director’s or manager’s decision presuming that he or she acted with due care?

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation ANSWER Business judgment rule.

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation Which rule is being applied when the director or officer must first present a business opportunity to the corporation before taking that opportunity for him- or herself?

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation ANSWER Corporate opportunity doctrine.

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation Pre-Learning Question How do you think a limited liability company is managed?

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation In a limited liability company, the owners can either Managing a Limited Liability Company manage the firm on their own choose an outside administrator

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation With a member-managed LLC, the owners themselves run the firm. Management authority is apportioned based upon the money contributed by each member. Member-Managed LLCs

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation Outside managers, hired by the members of the LLC, run manager- managed LLCs, and it is run much like a corporation would be run. Manager-Managed LLCs

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation If one manager runs the LLC, he or she acts like the CEO of a corporation. If the members hire a group of managers, they would act like a board of directors. Manager-Managed LLCs

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation Regardless of whether an LLC is run by the members themselves or by managers, a fiduciary duty still exists between those who run an LLC and the LLC itself. Fiduciary Duties

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation Reviewing What You Learned 1. 1.What is the business judgment rule? Section 29.2 Assessment

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation Reviewing What You Learned When the court presumes that a manager’s decision was made in good faith, with due care within the law, and in the corporation’s best interest. Section 29.2 Assessment Answer

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation Reviewing What You Learned 2. 2.What is the fairness rule? Section 29.2 Assessment

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation Reviewing What You Learned The burden a manager has of proving that the decision he or she made was fair to the corporation. Section 29.2 Assessment Answer

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation Reviewing What You Learned 3. 3.What is the corporate opportunity doctrine? Section 29.2 Assessment

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation Reviewing What You Learned Directors and officers cannot take a business opportunity for themselves if they have sure knowledge that the corporation would want to take that opportunity itself. Section 29.2 Assessment Answer

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation Reviewing What You Learned 4. 4.What is the difference between a member-managed LLC and a manager-managed LLC? Section 29.2 Assessment

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation Reviewing What You Learned A member-manager LLC is one that is run by the owners themselves. A manager- managed LLC is directed by outside managers. Section 29.2 Assessment Answer

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation Section 29.2 Assessment Critical Thinking Activity Antiliability Statutes Why have some states passed antiliability statutes to protect directors?

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation Section 29.2 Assessment Critical Thinking Activity Answer Antiliability Statutes Answers will vary but could recognize that directors are not involved in the day-to-day activity of the corporation and therefore need limited liability.

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation Section 29.2 Assessment Legal Skills in Action The Fairness Rule You have decided to bring a lawsuit against the directors of a corporation in which you own stock, alleging that the officers gave themselves an overly large salary increase.

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation Section 29.2 Assessment Legal Skills in Action The Fairness Rule Write a speech in which you explain how to apply the fairness rule to judge the conduct of corporate directors and officers.

Understanding Business and Personal Law Management Responsibilities Section 29.2 Operating a Corporation Section 29.2 Assessment Legal Skills in Action Answer The Fairness Rule Speeches will vary but should include that if the director or officer has not met at least one of the disclosure and approval requirements, then they have the burden of proving the decision is fair to the corporation.

Management Responsibilities End of Section 29.2