02/09 Corporations Question

Corporation has 20 shareholders. Its largest shareholder, Major, owns just over 30 percent (30%) of Corporation’s shares. No other shareholder owns more than five percent (5%) of the shares.

Major is also the president and one of the five directors of Corporation. The other four directors are also shareholders of Corporation.

Over the past two years Major, acting in his capacity as president of Corporation, has persuaded Corporation’s board of directors (Board) to approve the purchase of a number of valuable items of Major’s personal property appropriate for Corporation’s business. Corporation paid vastly inflated prices for Major’s property.

Major always informed Board of each proposed purchase before it was made. In each case, Minor, another member of Board, asked Major whether the purchase price was “fair.” Major always replied: “I have investigated the value of my property to be purchased by Corporation and I assure you that the purchase price represents its fair market value.” Board, relying on this statement and undertaking no further inquiry, always approved the purchases, with Major abstaining from voting.

Corporation’s articles of incorporation contain a provision that exculpates the directors of the corporation for liability to the corporation for money damages “to the fullest extent permitted” by the applicable corporation-law statute.

A shareholder derivative suit has been properly brought against Corporation’s directors seeking money damages for breach of their fiduciary duties as directors with regard to the transactions between Corporation and Major.

1. Will the directors (other than Major) be protected from liability by the business judgment rule? Explain.

2. Will Major be protected from liability by the business judgment rule? Explain.

3. Will Major be protected from liability by Board’s approval of the transactions? Explain.

4. Will the directors (other than Major) be protected from liability by the exculpatory provision in the articles of incorporation? Explain.

5.  Will Major be protected from liability by the exculpatory provision in the articles of incorporation? Explain.