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Corporations - Essay Example

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Course Institution Date Corporations Exam, Question 1: Part I: Substantive and Procedural Merits of Lawsuit # 1 The Complaint against the Board of Directors The class action against the board of directors is founded on the assumption that directors are fiduciaries…
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Download file to see previous pages In this regard, a duty of care involves the duty to ensure that the corporation’s interests are protected and in doing so, directors must ensure that their conduct does not bring about harm to the corporation (Guth v Loft, Inc.). In the class action lawsuit against the board, the claim is that the board of directors is jointly liable for the illegal conduct of Operator and Accountant. The claim is therefore substantiated by findings that board directors Operator and Account breached their duty of loyalty and the board as a whole was negligent in not preventing or acquiescing in that breach of the duty of loyalty. Liability in this regard will be founded on the statutory duty of care articulated by the Model Business Corporation Act 1984. Pursuant to Section 8.30 of the Model Business Corporation Act 1984, directors have a responsibility to act with the care of an ordinary reasonable person in the director’s position and how such a person would be expected to act in “similar circumstances” (Model Business Corporation Act, Section 8.30). Therefore the substantive issue is whether or not the board as whole indirectly and through agency, breached the duty of loyalty and in doing so, directly breached the duty of care. From a purely procedural perspective, the business judgment rule engages judicial review of the substantive issues and argument. ...
On the facts of the case, it appears that the board relied on Accountant and his teams to appropriately carry out the corporation’s financial affairs. Moreover, the audited financial statements sent to the directors would not have revealed an obvious issue although a closer examination of the books would have revealed the unlawful activities. The main question in assessing the business judgment rule is therefore whether or not it was prudent for the board to trust Accountant and to accept the audited financial statements at face value. Since audited financial statements are usually prepared by a certified public accountant and its authentic is confirmed by the certified public accountant, it does not appear to be unreasonable for the board to rely on the audited financial statements (Merrill Lynch). If the certified public accountant was Accountant and his team, it is only with hindsight that the board might have a reason to second guess his preparation of the audited financial statements. Therefore this part of the class action lawsuit will not likely succeed. The board appears to have acted prudently or reasonably and had a rational basis for their decision and cannot be said to have acted in breach of a duty of care and therefore did not breach the duty of loyalty. With respect to the payment of a US$50 fine to avoid an indictment against the company, it can be argued that this particular act is negligent since the case against Operator appears to be falling apart. Procedurally, if the case against Operator, the main actor in the scandal is weakening, the case against Mousetrap is decidedly weaker. However, the prospect of facing an investigation and an ...Download file to see next pages Read More
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