Part 10- Corporations, Chapter 43: Management of Corporations, Doc 7

This section discusses fiduciary duties of directors and officers, particularly in handling corporate opportunities, self-dealing in parent-subsidiary transactions, oppression of minority shareholders, and the obligations surrounding insider trading. Notable cases, including Guth v. Loft and Coggins v. New England Patriots Football Club, illustrate the legal standards applied in these areas. Usurpation of Corporate Opportunities Directors and officers are liable for taking corporate opportunities that belong to the corporation, especially when these arise in their official capacity. Courts often apply:   Line of Business Test: Examines if the opportunity closely aligns with the corporation’s business. Interest or Expectancy Test: Considers whether the corporation has a recognized interest or expectation in the opportunity. In Guth v. Loft, the president of Loft Inc. used the company’s resources to develop Pepsi-Cola for personal gain, an action the court deemed a usurpation of corporate opportunity. The court ruled that Guth had a duty to present the Pepsi opportunity to Loft, as it directly related to the company’s soda syrup business. Conflict of Interest in Parent-Subsidiary Transactions When a parent corporation controls a subsidiary, transactions must pass the intrinsic fairness test to prevent overreaching. The test requires that all aspects of the transaction are fair, especially if directors hold positions in both companies, potentially compromising arm’s-length negotiations. Minority Shareholder Oppression and Freeze-Outs Directors owe a duty to act in the best interest of the corporation and all shareholders, but in closely held corporations, minority shareholders may experience oppression when majority shareholders pay themselves high salaries, refuse dividends, or deny employment opportunities to minority shareholders. Oppression often involves a freeze-out, whereby the majority removes minority shareholders through: 1. Freeze-Out Merger: Merging the corporation into a new entity controlled solely by majority shareholders. 2. Reverse Share Split: Reducing share quantity to create fractional shares for minority shareholders, then buying these out for cash. In Coggins v. New England Patriots Football Club, a freeze-out was deemed unlawful because it was structured solely to allow the majority shareholder, Sullivan, to repay personal debts, serving no legitimate business purpose. Insider Trading and Fiduciary Duty Directors and officers have a duty to abstain from using nonpublic information for personal gain. The trend in judicial rulings emphasizes that corporate insiders must disclose material information before trading on it, or refrain from trading altogether. This duty protects the corporation and its shareholders from unfair informational advantages. These cases and principles highlight the strict standards directors and officers must follow to avoid conflicts of interest, ensure fairness in transactions, and protect the interests of minority shareholders and the corporation itself.