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Chapter 36
cases: 36-7
JUDGMENT
Jesse Derr (defendant) should bear personal responsibility. When the agent interacts with
a third party, if the third party knows that the agent is acting for the principal, but does not
notify the principal’s identity, the principal’s identity is unknown. (Restatement (Third) of
Agency, § 1.04 comment b (2006)). Jesse Derr (defendant), as the client, did not disclose
information about himself as client to Treadwells (plaintiff). According to the law, Jesse Derr
(defendant) should be personally responsible for the performance of the contract signed by
the non-existent client JD Construction, Co., Inc.
I.
LEGAL PRINCIPLE
A. Issue
Whether the court should sign a contract and claim to act on behalf of a corporate entity that
he knows does not exist, whether to bear personal liability contracts for damages caused by
failure to perform the contract correctly.
B. Holding
Affirmative
III.
Reasoning
A. General Analysis
Jesse Derr (defendant) created JCDER Inc. to run his construction business, but
without informing Maine’s Secretary of State, J.D. Construction Co. Inc was used
as the company name to conduct his business. When accepting the business of
Treadwells (plaintiff), Jesse Derr (defendant) hired a subcontractor to carry out the
work. However, when the company did not make money, Jesse Derr (defendant)
chose to give up his job, resulting in the lack of Treadwells’s house. Completed
and caused losses. Jesse Derr (defendant) did not inform Treadwells (plaintiff) that
he was an agent of JCDER Inc. while acting as an agent but concealed his identity
as an agent. However, when the agent interacts with a third party, if the third party
knows that the agent is acting for the principal, but does not notify the identity of
the principal, the identity of the principal is unknown. Jesse Derr (defendant)
should be held responsible.
II.
IV.
B. Applied Analysis
Jesse Derr (the defendant) concealed from Treadwells (the plaintiff) that he was an
agent of J.D. Construction Co. and JCDER, in violation of the agent law, and a
third party should be made aware of the identity of Jesse Derr’s agent. Jesse Derr
(the defendant) caused huge losses to Treadwells (the plaintiff). Should abide by
the agency law, disclose the identity of his agent to Treadwell (plaintiff) and
assume personal responsibility.
JUDGMENT
Jesse Derr, J.D. Construction Co. and JCDER (the defendant) should share the
responsibility. According to the agent law, they concealed the identity of Jesse Derr as
an agent from each other. In addition, J.D. Construction Co. and JCDER profited from
this behavior, and Jesse Derr shall bear full personal responsibility for the losses
caused by Treadwells.
Chapter 36
cases: 36-11
I.
JUDGMENT
Synergies3 and DIRECTV shall not be liable for compensation. First of all, the
behavior of McLaughlin and Castro is personal and does not bring benefits to the
employer, nor is it something that the employer tacitly approves. There is no evidence
that the theft or conversion was for the benefit of Synergies3 or DIRECTV or to
promote their benefit. Synergies3 and DIRECTV have no direct or indirect
responsibility. McLaughlin and Castro should compensate Corvo and Bonds
separately.
LEGAL PRINCIPLE
A. Issue
Whether the court should rule on the employer when it is unaware of the personal behavior of
the employee?
B. Holding
No
III.
Reasoning
A. General Analysis
Corvo and Bonds sued McLaughlin, Castro, DIRECTV and Synergies3 Tec
Services. They believe that McLaughlin and Castro were stealing and conversions
with the acquiescence of their employers. But the actions of McLaughlin and
Castro were carried out without the employer’s knowledge and did not generate
benefits for DIRECTV and Synergies3. DIRECTV and Synergies3 should not be
held indirectly or directly responsible for the personal actions of McLaughlin and
Castro.
II.
B. Applied Analysis
When McLaughlin and Castro stole, it was their personal behavior. It was an act
that was carried out suddenly while doing work, and there was no plan. Moreover,
this violated the direct order of the employer and did not get the acquiescence of
the employer. They steal for their own benefit, but the employer will not profit
from the theft. Therefore, there is no indirect or joint liability.
IV.
JUDGMENT
McLaughlin and Castro should compensate Corvo and Bonds and be responsible for
the theft. This is their personal behavior. At the same time, they also violated the
contract signed with the employer. DIRECTV and Synergies3 do not need to pay
additional compensation for employees’ personal actions in breach of contract,
because they did not profit from this matter, so there is no indirect liability.
problem cases: 2
Ms. Opp will lose the case. Ms. Opp believes that Soraghan has not obtained her
consent to the limitation of liability. Because Mr. Opp signed the contract but did not
consult Ms. Opp’s opinion on limitation of liability. According to the illinos law, there
is a two-part test for determining whether a principal-agent relationship exists: the
principal must have the right to control the manner and method in which work is
carried out by the alleged agent. Obviously, Ms. Opp has the right to control the way
and methods of Mr. Opp’s actions related to property transportation, so there is an
agency relationship between them. When the third party has reason to believe that the
principal has authorized the agent to act as its agent, the agent has the authority.
problem cases: 3
According to the relationship of the third party, one party appoints the other party to
carry out its business activities. Party A who entrusts Party B is called the principal,
and Party B who entrusts Party B to conduct business operations of the principal is the
agent called the principal. In the relationship with a third party, the principle is that
the principal completes the work from the agent, and the agent gets paid for his work.
In the relationship with a third party, in principle, the principal is fully responsible for
the agent’s actions. In this case, PD is AQ’s agent, and AQ must bear the losses caused
by his agent PD. Therefore, the insurance company shall not be liable to claim
compensation from AQ after knowing the facts. So, Virginia Surety is right.
CASE 43-13
From the mid-1980s to the mid-1990s, The Walt Disney Company enjoyed remarkable success
under the guidance of Chairman and CEO Michael Eisner and President and Chief Operating Officer
Frank Wells. In 1994, Wells died in a helicopter crash, prematurely forcing the company to consider his
replacement. Eisner promoted the candidacy of his long-time friend, Michael Ovitz. Ovitz was the head
of Creative Artists Agency (CAA), which he and four others had founded in 1974. By 1995, CAA had
grown to be the premier Hollywood talent agency. CAA had 550 employees and an impressive roster
of about 1,400 of Hollywood’s top actors, directors, writers, and musicians, clients that generated $150
million in annual revenues for CAA. Ovitz drew an annual income of $20 million from CAA. He was
regarded as one of the most powerful figures in Hollywood.
To leave CAA and join Disney as its president, Ovitz insisted on an employment agreement that
would provide him downside risk protection if he was terminated by Disney or if he was interfered with
in his performance of his duties as president. After protracted negotiations, Ovitz accepted an
employment package that would provide him $23.6 million per year for the first five years of the deal,
plus bonuses and stock options. The agreement guaranteed that the stock options would appreciate at
least $50 million in five years or Disney would make up the difference. The Ovitz employment
agreement (OEA) also provided that if Disney fired Ovitz for any reason other than gross negligence or
malfeasance, Ovitz would be entitled to a non-fault termination (NFT) payment, which consisted of his
remaining salary, $7.5 million a year for any unaccrued bonuses, the immediate vesting of some stock
options, and a $10 million cashout payment for other stock options. While there was some opposition
to the employment agreement among directors and upper management at Disney, Ovitz was hired in
October 1995 largely due to Eisner’s insistence.
At the end of 1995, Eisner’s attitude with respect to Ovitz was positive. Eisner wrote, “1996 is
going to be a great year—We are going to be a great team—We every day are working better together—
Time will be on our side—We will be strong, smart, and unstoppable!!!” Eisner also wrote that Ovitz
performed well during 1995, notwithstanding the difficulties Ovitz was experiencing assimilating to
Disney’s culture.
Unfortunately, such optimism did not last long. In January 1996, a corporate retreat was held at
Walt Disney World in Orlando. At that retreat, Ovitz failed to integrate himself in the group of
executives by declining to participate in group activities, insisting on a limousine when the other
executives—including Eisner—were taking a bus, and making inappropriate demands of the park
employees. In short, Ovitz was a little elitist for the egalitarian Disney and a poor fit with his fellow
executives.
By the summer of 1996, Eisner had spoken with several directors about Ovitz’s failure to adapt to
the company’s culture. In the fall of 1996, directors began discussing that the disconnect between Ovitz
and Disney was likely irreparable and that Ovitz would have to be terminated. In December 1996, Ovitz
was officially terminated by action of Eisner alone. Eisner concluded that Ovitz was terminated without
cause, requiring Disney to make the costly NFT payment.
Shareholders of Disney brought a derivative action on behalf of Disney against Eisner and other
Disney directors. The shareholders alleged breaches of fiduciary duty in the hiring and firing of Ovitz.
Eisner and the other directors defended on the grounds that they had complied with the business
judgment rule. Because Disney was incorporated in Delaware, the case was brought in the Delaware
Court of Chancery. The chancery court found that Eisner and the other directors had complied with the
business judgment rule. The Disney shareholders appealed to the Delaware Supreme Court.
Jacobs, Justice
The shareholders’ claims are subdivisible into two groups: (A) claims arising out of the approval
of the OEA and of Ovitz’s election as President; and (B) claims arising out of the NFT severance
payment to Ovitz upon his termination.
A Claims Arising from the Approval of the OEA and Ovitz’s Election as President
The shareholders’ core argument in the trial court was that the Disney directors’ approval of the
OEA and election of Ovitz as President were not entitled to business judgment rule protection, because
those actions were either grossly negligent or not performed in good faith. The Court of Chancery
rejected these arguments, and held that the shareholders had failed to prove that the Disney defendants
had breached any fiduciary duty.
Our law presumes that in making a business decision the directors of a corporation acted on an
informed basis, in good faith, and in the honest belief that the action taken was in the best interests of
the company. Those presumptions can be rebutted if the shareholder shows that the directors breached
their fiduciary duty of care or of loyalty or acted in bad faith. If that is shown, the burden then shifts to
the director defendants to demonstrate that the challenged act or transaction was entirely fair to the
corporation and its shareholders.
Because no duty of loyalty claim was asserted against the Disney defendants, the only way to rebut
the business judgment rule presumptions would be to show that the Disney defendants had either
breached their duty of care or had not acted in good faith. The Chancellor determined that the
shareholders had failed to prove either. [The Delaware Supreme Court affirmed the Chancellor’s
finding.]
The shareholders next challenge the Court of Chancery’s determination that the full Disney board
was not required to consider and approve the OEA, because the Company’s governing instruments
allocated that decision to the compensation committee. This challenge also cannot survive scrutiny
Under the Company’s governing documents the board of directors was responsible for selecting
the corporation’s officers, but under the compensation committee charter, the committee was
responsible for establishing and approving the salaries, together with benefits and stock options, of the
Company’s CEO and President. The compensation committee also had the charterimposed duty to
“approve employment contracts, or contracts at will” for “all corporate officers who are members of the
Board of Directors regardless of salary.” That is exactly what occurred here. The full board ultimately
selected Ovitz as President, and the compensation committee considered and ultimately approved the
OEA, which embodied the terms of Ovitz’s employment, including his compensation.
The Delaware General Corporation Law (DGCL) expressly empowers a board of directors to
appoint committees and to delegate to them a broad range of responsibilities, which may include setting
executive compensation. Nothing in the DGCL mandates that the entire board must make those
decisions. At Disney, the responsibility to consider and approve executive compensation was allocated
to the compensation committee, as distinguished from the full board. The Chancellor’s ruling—that
executive compensation was to be fixed by the compensation committee—is legally correct
In the Court of Chancery the shareholders argued that the board had failed to exercise due care,
using a director-by-director, rather than a collective analysis. In this Court, however, the shareholders
argue that the Chancellor erred in following that very approach. An about-face, the shareholders now
claim that in determining whether the board breached its duty of care, the Chancellor was legally
required to evaluate the actions of the old board collectively.
We reject this argument, without reaching its merits, for two separate reasons. To begin with, the
argument is precluded by Rule 8 of this Court [on procedural grounds.] The shareholders next challenge
the Chancellor’s determination that although the compensation committee’s decision-making process
fell far short of corporate governance “best practices,” the committee members breached no duty of
care in considering and approving the NFT terms of the OEA. That conclusion is reversible error, the
shareholders claim, because the record establishes that the compensation committee members did not
properly inform themselves of the material facts and, hence, were grossly negligent in approving the
NFT provisions of the OEA.
In our view, a helpful approach is to compare what actually happened here to what would have
occurred had the committee followed a “best practices” (or “best case”) scenario, from a process
standpoint. In a “best case” scenario, all committee members would have received, before or at the
committee’s first meeting on September 26, 1995, a spreadsheet or similar document prepared by (or
with the assistance of) a compensation expert (in this case, Graef Crystal). Making different, alternative
assumptions, the spreadsheet would disclose the amounts that Ovitz could receive under the OEA in
each circumstance that might foreseeably arise. One variable in that matrix of possibilities would be the
cost to Disney of a non-fault termination for each of the five years of the initial term of the OEA. The
contents of the spreadsheet would be explained to the committee members, either by the expert who
prepared it or by a fellow committee member similarly knowledgeable about the subject. That
spreadsheet, which ultimately would become an exhibit to the minutes of the compensation committee
meeting, would form the basis of the committee’s deliberations and decision.
Regrettably, the committee’s informational and decisionmaking process used here was not so tidy.
That is one reason why the Chancellor found that although the committee’s process did not fall below
the level required for a proper exercise of due care, it did fall short of what best practices would have
counseled.
The Disney compensation committee met twice: on September 26 and October 16, 1995. The
minutes of the September 26 meeting reflect that the committee approved the terms of the OEA (at that
time embodied in the form of a letter agreement), except for the option grants, which were not approved
until October 16—after the Disney stock incentive plan had been amended to provide for those options.
At the September 26 meeting, the compensation committee considered a “term sheet” which, in
summarizing the material terms of the OEA, relevantly disclosed that in the event of a non-fault
termination, Ovitz would receive: (i) the present value of his salary ($1 million per year) for the balance
of the contract term, (ii) the present value of his annual bonus payments (computed at $7.5 million) for
the balance of the contract term, (iii) a $10 million termination fee, and (iv) the acceleration of his
options for 3 million shares, which would become immediately exercisable at market price.
Thus, the compensation committee knew that in the event of an NFT, Ovitz’s severance payment
alone could be in the range of $40million cash, plusthe value of the accelerated options. Because the
actual payout to Ovitz was approximately $130 million, of which roughly $38.5 million was cash, the
value of the options at the time of the NFT payout would have been about $91.5 million. Thus, the issue
may be framed as whether the compensation committee members knew, at the time they approved the
OEA, that the value of the option component of the severance package could reach the $92 million
order of magnitude if they terminated Ovitz without cause after one year. The evidentiary record shows
that the committee members were so informed.
On this question the documentation is far less than what best practices would have dictated. There
is no exhibit to the minutes that discloses, in a single document, the estimated value of the accelerated
options in the event of an NFT termination after one year. The information imparted to the committee
members on that subject is, however, supported by other evidence, most notably the trial testimony of
various witnesses about spreadsheets that were prepared for the compensation committee meetings.
The compensation committee members derived their information about the potential magnitude of
an NFT payout from two sources. The first was the value of the “benchmark” options previously granted
to Eisner and Wells and the valuations by Raymond Watson [a Disney director, member of Disney’s
compensation committee, and past Disney board chairman who had helped structure Wells’s and
Eisner’s compensation packages] of the proposed Ovitz options. Ovitz’s options were set at 75% of
parity with the options previously granted to Eisner and to Frank Wells. Because the compensation
committee had established those earlier benchmark option grants to Eisner and Wells and were aware
of their value, a simple mathematical calculation would have informed them of the potential value range
of Ovitz’s options. Also, in August and September 1995, Watson and Irwin Russell [a Disney director
and chairman of the compensation committee] met with Crystal to determine (among other things) the
value of the potential Ovitz options, assuming different scenarios. Crystal valued the options under the
Black-Scholes method, while Watson used a different valuation metric. Watson recorded his
calculations and the resulting values on a set of spreadsheets that reflected what option profits Ovitz
might receive, based upon a range of different assumptions about stock market price increases. Those
spreadsheets were shared with, and explained to, the committee members at the September meeting.
The committee’s second source of information was the amount of “downside protection” that Ovitz
was demanding. Ovitz required financial protection from the risk of leaving a very lucrative and secure
position at CAA, of which he was a controlling partner, to join a publicly held corporation to which
Ovitz was a stranger, and that had a very different culture and an environment which prevented him
from completely controlling his destiny. The committee members knew that by leaving CAA and
coming to Disney, Ovitz would be sacrificing “booked” CAA commissions of $150 to $200 million—
an amount that Ovitz demanded as protection against the risk that his employment relationship with
Disney might not work out. Ovitz wanted at least $50 million of that compensation to take the form of
an “up-front” signing bonus. Had the $50 million bonus been paid, the size of the option grant would
have been lower. Because it was contrary to Disney policy, the compensation committee rejected the
up-front signing bonus demand, and elected instead to compensate Ovitz at the “back end,” by awarding
him options that would be phased in over the five-year term of the OEA.
It is on this record that the Chancellor found that the compensation committee was informed of the
material facts relating to an NFT payout. If measured in terms of the documentation that would have
been generated if “best practices” had been followed, that record leaves much to be desired. The
Chancellor acknowledged that, and so do we. But, the Chancellor also found that despite its
imperfections, the evidentiary record was sufficient to support the conclusion that the compensation
committee had adequately informed itself of the potential magnitude of the entire severance package,
including the options, that Ovitz would receive in the event of an early NFT.
The OEA was specifically structured to compensate Ovitz for walking away from $150 million to
$200 million of anticipated commissions from CAA over the five-year OEA contract term. This meant
that if Ovitz was terminated without cause, the earlier in the contract term the termination occurred the
larger the severance amount would be to replace the lost commissions. Indeed, because Ovitz was
terminated after only one year, the total amount of his severance payment (about $130 million) closely
approximated the lower end of the range of Ovitz’s forfeited commissions ($150 million), less the
compensation Ovitz received during his first and only year as Disney’s President. Accordingly, the
Court of Chancery had a sufficient evidentiary basis in the record from which to find that, at the time
they approved the OEA, the compensation committee members were adequately informed of the
potential magnitude of an early NFT severance payout.
The shareholders’ final claim in this category is that the Court of Chancery erroneously held that
the remaining members of the old Disney board had not breached their duty of care in electing Ovitz as
President of Disney. This claim lacks merit, because the arguments shareholders advance in this context
relate to a different subject—the approval of the OEA, which was the responsibility delegated to the
compensation committee, not the full board.
The Chancellor found and the record shows the following: well in advance of the September 26,
1995 board meeting the directors were fully aware that the Company needed—especially in light of
Wells’ death and Eisner’s medical problems—to hire a “number two” executive and potential successor
to Eisner. There had been many discussions about that need and about potential candidates who could
fill that role even before Eisner decided to try to recruit Ovitz. Before the September 26 board meeting
Eisner had individually discussed with each director the possibility of hiring Ovitz, and Ovitz’s
background and qualifications. The directors thus knew of Ovitz’s skills, reputation and experience, all
of which they believed would be highly valuable to the Company. The directors also knew that to accept
a position at Disney, Ovitz would have to walk away from a very successful business—a reality that
would lead a reasonable person to believe that Ovitz would likely succeed in similar pursuits elsewhere
in the industry. The directors also knew of the public’s highly positive reaction to the Ovitz
announcement, and that Eisner and senior management had supported the Ovitz hiring. Indeed, Eisner,
who had long desired to bring Ovitz within the Disney fold, consistently vouched for Ovitz’s
qualifications and told the directors that he could work well with Ovitz.
The board was also informed of the key terms of the OEA (including Ovitz’s salary, bonus, and
options). Russell reported this information to them at the September 26, 1995 executive session, which
was attended by Eisner and all non-executive directors. Russell also reported on the compensation
committee meeting that had immediately preceded the executive session. And, both Russell and Watson
responded to questions from the board. Relying upon the compensation committee’s approval of the
OEA and the other information furnished to them, the Disney directors, after further deliberating,
unanimously elected Ovitz as President.
Based upon this record, we uphold the Chancellor’s conclusion that, when electing Ovitz to the
Disney presidency the remaining Disney directors were fully informed of all material facts, and that the
shareholders failed to establish any lack of due care on the directors’ part.
To summarize, the Court of Chancery correctly determined that the decisions of the Disney
defendants to approve the OEA, to hire Ovitz as President, and then to terminate him on an NFT basis,
were protected business judgments, made without any violations of fiduciary duty. Having so concluded,
it is unnecessary for the Court to reach the shareholders’ contention that the Disney defendants were
required to prove that the payment of the NFT severance to Ovitz was entirely fair.
Judgment for Eisner and the other directors affirmed.
CASE 43-20
Caremark International was a health care company specializing in alternative-site care. After a
lengthy investigation by the Department of Justice, the company and two of its executives—but none
of its board members—were indicted for paying illegal kickbacks to doctors for patient referrals.
Numerous shareholder derivative suits were filed alleging that Caremark’s directors breached their duty
of care by failing to supervise the offending executives, thereby exposing the company to criminal and
civil liability. The suits sought to recover damages from the individual board members. Caremark
eventually reached a settlement with the DOJ and a host of federal agencies; the company would plead
guilty and pay approximately $250 million in civil penalties but would be allowed to continue
participating in federal programs. An announcement of the settlement of the derivative claims followed,
but it required court approval before it could be finalized. Legendary Delaware Chancery Court judge
William T. Allen had the task of approving or disapproving the settlement. In doing so, he effectively
overruled the law in Delaware at the time, holding that directors had no affirmative duty to oversee
legal compliance at the corporation absent clear signs of employee wrongdoing, as established in
Graham v. Allis-Chalmers Manufacturing Co., 188 A.2d 125 (Del. 1963), discussed below within the
case decision.
ALLEN, Chancellor B. Directors’ Duties to Monitor Corporate Operations
The complaint charges the director defendants with breach of their duty of attention or care in
connection with the on-going operation of the corporation’s business. The claim is that the directors
allowed a situation to develop and continue which exposed the corporation to enormous legal liability
and that in so doing they violated a duty to be active monitors of corporate performance. The complaint
thus does not charge either director self-dealing or the more difficult loyalty-type problems arising from
cases of suspect director motivation, such as entrenchment or sale of control contexts. The theory here
advanced is possibly the most difficult theory in corporation law upon which a plaintiff might hope to
win a judgment. * * *
2. Liability for failure to monitor: The second class of cases in which director liability for
inattention is theoretically possible entail circumstances in which a loss eventuates not from a decision
but, from unconsidered inaction. Most of the decisions that a corporation, acting through its human
agents, makes are, of course, not the subject of director attention. Legally, the board itself will be
required only to authorize the most significant corporate acts or transactions: mergers, changes in capital
structure, fundamental changesin business, appointment and compensation of the CEO, etc. As the facts
of this case graphically demonstrate, ordinary business decisions that are made by officers and
employees deeper in the interior of the organization can, however, vitally affect the welfare of the
corporation and its ability to achieve its various strategic and financial goals. * * * Financial and
organizational disasters such as [in this case] raise the question, what is the board’s responsibility with
respect to the organization and monitoring of the enterprise to assure that the corporation functions
within the law to achieve its purposes? * * *
In 1963, the Delaware Supreme Court in [Graham] addressed the question of potential liability of
board members for losses experienced by the corporation as a result of the corporation having violated
the anti-trust laws of the United States. There was no claim in that case that the directors knew about
the behavior of subordinate employees of the corporation that had resulted in the liability. Rather, asin
this case, the claim asserted wasthat the directors ought to have known of it and if they had known they
would have been under a duty to bring the corporation into compliance with the law and thus save the
corporation from the loss. The Delaware Supreme Court concluded that, under the facts as they appeared,
there was no basis to find that the directors had breached a duty to be informed of the ongoing operations
of the firm. In notably colorful terms, the court stated that “absent cause for suspicion there is no duty
upon the directors to install and operate a corporate system of espionage to ferret out wrongdoing which
they have no reason to suspect exists.” The Court found that there were no grounds for suspicion in that
case and, thus, concluded that the directors were blamelessly unaware of the conduct leading to the
corporate liability.
How does one generalize this holding today? Can it be said today that, absent some ground giving
rise to suspicion of violation of law, that corporate directors have no duty to assure that a corporate
information gathering and reporting systems [sic] exists which represents a good faith attempt to
provide senior management and the Board with information respecting material acts, events or
conditions within the corporation, including compliance with applicable statutes and regulations? I
certainly do not believe so. I doubt that such a broad generalization of the Graham holding would have
been accepted by the Supreme Court in 1963. The case can be more narrowly interpreted as standing
for the proposition that, absent grounds to suspect deception, neither corporate boards nor senior officers
can be charged with wrongdoing simply for assuming the integrity of employees and the honesty of
their dealings on the company’s behalf.
A broader interpretation of Graham—that it means that a corporate board has no responsibility to
assure that appropriate information and reporting systems are established by management—would not,
in any event, be accepted by the Delaware Supreme Court [today], in my opinion. In stating the basis
for this view, I start with the recognition that in recent yearsthe Delaware Supreme Court has made it
clear—especially in its jurisprudence concerning takeovers, from Smith v. Van Gorkom through
Paramount Communications—the seriousness with which the corporation law views the role of the
corporate board. Secondly, I note the elementary fact that relevant and timely information is an essential
predicate for satisfaction of the board’s supervisory and monitoring role under Section 141 of the
Delaware General Corporation Law. Thirdly, I note the potential impact of the federal organizational
sentencing guidelines on any business organization. [The guidelines set forth a uniform sentencing
structure for organizations to be sentenced for violation of federal criminal statutes and offer powerful
incentives for corporationsto put in place compliance programsto detect violations of law, promptly to
report violations to appropriate public officials when discovered, and to take prompt, voluntary remedial
efforts.] Any rational person attempting in good faith to meet an organizational governance
responsibility would be bound to take into account this development and the enhanced penalties and the
opportunities for reduced sanctions that it offers.
In light of these developments, it would, in my opinion, be a mistake to conclude that our Supreme
Court . . . means that corporate boards may satisfy their obligation to be reasonably informed concerning
the corporation, without assuring themselves that information and reporting systems exist in the
organization that are reasonably designed to provide to senior management and to the board itself timely,
accurate information sufficient to allow management and the board, each within its scope, to reach
informed judgments concerning both the corporation’s compliance with law and its business
performance.
Obviously the level of detail that is appropriate for such an information system is a question of
business judgment. And obviously too, no rationally designed information and reporting system will
remove the possibility that the corporation will violate laws or regulations, or that senior officers or
directors may nevertheless sometimes be misled or otherwise fail reasonably to detect acts material to
the corporation’s compliance with the law. But it is important that the board exercise a good faith
judgment that the corporation’s information and reporting system is in concept and design adequate to
assure the board that appropriate information will come to its attention in a timely manner as a matter
of ordinary operations, so that it may satisfy its responsibility.
Thus, I am of the view that a director’s obligation includes a duty to attempt in good faith to assure
that a corporate information and reporting system, which the board concludes is adequate, exists, and
that failure to do so under some circumstances may, in theory at least, render a director liable for losses
caused by non-compliance with applicable legal standards. * * *
The record at this stage does not support the conclusion that the defendants either lacked good faith
in the exercise of their monitoring responsibilities or conscientiously permitted a known violation of
law by the corporation to occur.
Thus, the proposed settlement will be APPROVED.
QUESTIONS
4. The Chicago National League Ball Club (Chicago Cubs) operated Wrigley Field, the Cubs’s home
park. Through the 1965 baseball season, the Cubs were the only major league baseball team that played
no home games at night because Wrigley Field had no lights for nighttime baseball. Philip K. Wrigley,
director and president of the corporation, refused to install lights because of his personal opinion that
baseball was a daytime sport and that installing lights and scheduling night baseball games would result
in the deterioration of the surrounding neighborhood. The other directors assented to this policy. From
1961 to 1965, the Cubs suffered losses from their baseball operations. The Chicago White Sox, whose
weekday games were generally played at night, drew many more fans than did the Cubs. A shareholder
sued the board of directors to force them to install lights at Wrigley Field and to schedule night games.
What did the court rule? Why?
7. Simon J. Michael, a director of Shocking Technologies, was the only representative of the holders of
two classes of Shocking preferred stock. Over time, significant disagreements between Michael and the
other board members arose over executive compensation and whether preferred shareholders should
have increased board representation. Michael argued that the company’s governance problems needed
to be resolved before it could attract additional equity funding, which the company desperately needed.
Michael understood that Shocking’s survival likely depended upon a large investment by a third party,
Littelfuse. Michael spoke with Littelfuse to try to align Littelfuse’s interests with his. Michael not only
sought to dissuade Littelfuse from investing in Shocking, but also disclosed to Littelfuse Shocking’s
confidential business information that Littelfuse was the only potential investor likely to participate in
the necessary fund-raising. By informing Littelfuse that there were no other options available to
Shocking, Michael gave Littelfuse a significantly enhanced strategic bargaining position with Shocking.
Michael believed that Shocking’s resulting cash crunch would force the rest of the board to implement
his objectives, which he believed served the interests of the preferred shareholders. Did Michael breach
his fiduciary duty to Shocking?
PROBLEM SOLUTIONS AND ESSAY ANSWERS
Langvardt et al., BUSINESS LAW (17th ed. 2018)
by
Robert S. Wiener
Problem solutions and examination essay answers are similar. Both call upon
you to apply legal principles to practical business situations. Your answers must set
forth reasons for conclusions stated. Organize and write them clearly using standardEnglish syntax and spelling. Include the area of law, parties, and legal issues. Include,
explain, and apply legal terms.
PROBLEM SOLUTIONS
Problem solving prepares you to write examination essays. Read the chapter and
assigned case opinions and write your case briefs. Then read the first assigned problem
a couple of times. Return to the text and analytically read the part of the chapter that
discusses the legal issue(s) raised in the problem. Keep an eye out for legal terms in
the problem. They are a key to the legal issue(s) and may appear in bold type in the
text. Read the problem again. You may want to make notes for your solution now — at
least, organize it in your mind. Do this without looking back at the text.
You are ready to write your problem solution. The advice given in “Cases and
Briefs” will help. For problems containing multiple questions, repeat the brief format writing your solution as an essay using separate paragraphs for separate sections. You do
not need to use headings. Leave space at the margins and between the sections of
your solution to revise it, for example, during/after classroom review.
The format for a problem solution and essay answer is a modification of your
brief format. It will generally look like this:
January 28, 211/28/21
1
PROBLEM SOLUTIONS AND ESSAY ANSWERS
Langvardt et al., BUSINESS LAW (17th ed. 2018)
I
JUDGMENT
II
A
B
LEGAL PRINCIPLE
ISSUE
(Question of Law)
HOLDING (Answer of Law)
A
B
REASONING
GENERAL ANALYSIS
APPLIED ANALYSIS
III
IV
JUDGMENT
I. JUDGMENT
In the first section, present your judgment. Omit the facts section. Copying facts
takes time with no benefit; however, you will refer to specific facts in your applied analysis section. Unlike briefs where you are asked to show your understanding of the
judge’s judgment, here you give your judgment (legal decision) based upon legal principles. Usually, in your problem solution you are called upon to judge a case, that is, to
decide who wins and explain why. If you are not yet clear on your judgment, leave this
section blank and return to it after you have written your reasoning sections.
II. LEGAL PRINCIPLE
Now your real work begins. In this section write the key legal principle guiding
your judgment, that is, your issue and holding. Merely writing the judgment is not
enough, even if it is correct. More importantly, you must explain your judgment. How
did you arrive at your conclusion?
!
1/28/21
2
PROBLEM SOLUTIONS AND ESSAY ANSWERS
Langvardt et al., BUSINESS LAW (17th ed. 2018)
I. REASONING
A. GENERAL ANALYSIS
This is General Analysis is the first part of your legal reasoning, your, including
the area of law. Elaborate on the issue and holding and discuss secondary legal issues.
This section should be fully developed, step-by-step, particularly for examination essays. You will base this on legal principles learned from reading the textbook, reading
and briefing cases, and class lecture and discussion.
B. APPLIED ANALYSIS
In Applied Analysis apply the general analysis to the problem’s relevant facts.
IV. JUDGMENT
Repeat your judgment to confirm that this is the legal decision to which your analysis leads. Has your judgment changed? If so, correct the judgment in your first section
so that both judgments match.
Problems and essay questions are often tricky. You may be unsure of the judgment. That is OK. There may be no clear answer. The correct answer usually earns only
10 points on an examination. And you may earn full credit for either of two different answers. Your objective is to convey that you have thought through the case from a business law perspective; therefore, the most important parts of your problem solutions and
essay answers are your legal principle and reasoning section.
How much time should this take? In order to be prepared to write well-organized
and thorough exam essays, for homework problem solutions, first read the relevant part
of the of textbook, then spend at least 20 minutes answering each problem.
January 28, 211/28/21
3
PROBLEM SOLUTIONS AND ESSAY ANSWERS
Langvardt et al., BUSINESS LAW (17th ed. 2018)
ESSAY ANSWERS
Essay answers are different from problem solutions in a few ways. Exams are
closed book and timed. You may have aout 40 minutes to answer an exam essay compared to 15-20 minutes on a CPA exam. First, read the question at the end of the essay. Next, use your case reading techniques to read the question’s facts several times.
Plan your answer before you begin writing. Crossing out and rewriting essay answers
wastes time. Exam questions are likely to be lengthier and more complicated than problems, with more facts and raising several legal issues rather than just one.
Grading of Essay Answers
Your grades on exam essay answers largely reflect your preparation. If you have
written your assignments (both case briefs and problem solutions), participated in class,
taken effective notes, and studied your assignments and notes well, reviewing them
soon after class, you should understand the legal principles and be able you to apply
them to new situations.
To earn more essay points, spot legal issues in essay questions. Then answer
those questions using legal terms to explain and apply relevant legal principles learned
in class. Basic terms, especially those written on the board, may earn credit if used appropriately and explained. A minimum of 120 points will be available for each exam; correct judgments earn 10 points. Sometimes, legal labeling of parties, for example, assignor and assignee in an assignment of rights contract case, will earn credit.
The better you prepare for exam essays by writing class assignments (and even
writing extra practice problem solution essays), the better you will perform on the exam
essays.
1/28/21
4

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