Corporation American Law: A Fiduciary Duty of Trust - Assignment Example

Fiduciary duties are those that are recognized by all courts as being the identification and the legal factors behind a multitude of special relationship factors. The duty exists in cases where the intrinsic function of one of the parties in question is to take care of the best interests of the other in manner that could be exemplified1. A fiduciary duty of trust can exist in a relationship between the solicitor and his client, a physician and his patient, the parent and children and the director and the corporation that is he a part of. Confidence and trust is entailed by fiduciary relationships and they are acts of honesty favoring beneficiaries’ interests. Theoretically speaking, In any given corporate at any given point of time therefore, the appointed directors by virtue of the fact that they have responsibility of the company and some kind of answerability to the organization, are responsible for the well being of the company. In this context therefore the behavior of company directors and officials is open to fastidious inspection and analysis, given the fact that most such directors and executive charge the company high fees in return for their services, the fact that they owe the company a duty of trust and care is fair and justified. In order to figure out whether or not the Ewing family stands in breach of the duty of trust one has to first understand what the duty entails. Texas law defines fiduciary duty of as being inclusive of duties of loyalty, care, good faith and obedience [Gearhart Industries, Inc. v. Smith International, Inc., 741 F.2d 707, 719 (5th Cir. 1984)]. In Delaware more specifically, it includes the duties of loyalty, care and good faith. Also in alignment with this is the duty of disclosures, in Texan law. This however is not of significant consequence here. For the purpose of our requirement, one needs to state at the outset that historically, a low standard of duty has been applicable on directors [see Re City Equitable Fire and Insurance Co Ltd]. Theoretically however, it also needs to be stated that directors by virtue of the fact that they are in a fiduciary relationship with the company and owe a duty of care to the corporation and a duty of good faith and disclosure to the other stakeholders, they must act in what they believe to be the best interest of the company2. They must not for example place themselves in a position in which their personal interests or duties to others are liable to conflict with their duties to the company [Re Welfab Engineers Ltd (1990) BCC 600], [Re Purpoint (1991) BCC 121]3. In the light of these statements, what becomes obvious is that first, the Ewing family did owe a duty of fiduciary care and disclosure to Ewing Oil Corp and to the Barnes family them being the other stakeholders. In addition, in the light of the fact that the Barnes family was against personal loan from the Ewing family to the company due to apprehensions about foreclosure, the claim that the Ewings acted in a capacity favoring personal ends of the ends of the comp-nay can be proved. They put the company in position wherein the personal claims of the family are in direct conflict with those of the company and its other shareholders. The best thing for the Ewing family to do right now would be to withdraw the demand of lone foreclosure and get the company into profit again. The fact that the Ewings were acting in the best interests of the company can be argued but the point of collision is not defendable in this case. The burden of proof would lie with the Ewings as well given the fact that they would have to prove that they were acting in the best interests of the company. And even now, if they were to ask for repayment of loan, they are for all intents and purposes, putting their personal interests over the interests of the company. B) If the lender is not the family as a collective unit but Mrs. Ellie, who is not a member of the Ewing Board, the situation would be completely reversed. Ellie has no direct responsibility or duty towards the corporation. She is just a lender from the market and has every right and entitlement to get payment on the money that she has loaned. Her relationship with the two members of the board bears no consequence on her financial decision making as the fiduciary duty care that is owed by the member of the board do not translate or transfer to other members of the director’s family. The problem in this case could arise if the Barnes could prove that the directors on board were the causing agents behind the loan and were using the subsequent powers to their personal advantage. It is here that the burden of proof shifts to the ones making allegation from Ewing family. 2) Proof of fiduciary duty to a minor partner In the state of Texas, like a number if other states, the "internal affairs doctrine” is usually followed. This essentially means that the internal affairs of the corporation, "including but not limited to the rights, powers, and duties of its board of directors and shareholders and matters relating to its shares," are governed by the laws of the jurisdiction of incorporation. Keeping this basic hypothesis in mind, one can anaylse the details of the Hollis V Hill 232 F.3d 460 (5th Cir. 2000)4. The case is an example of the manner in which a breach of fiduciary duty can be proved by the minor partner. The principles established in the case were laid down by the district court that applied Nevada law. The conclusion of the case was that the manner in which Hill conducted business vis-à-vis Hollis was oppressive. The court also ordered Hill to buy out Hollis’ shares in FFUSA. The citation principle governing the judgement was the capital call. The ruling alsi termed Hill firing Hollis as the "easiest objective data" that could be cited in support of the oppression claim. Finally, the judgment stated that the “more egregious” act of moving the annuity business to the Hill-sole-proprietorship should not have occurred without the approval of the board of directors. The court also ruled it wasn’t correct on part of Hills to interfere with Hollis. Hill was ordered by court to purchase Hollis' shares for $667,950, designating value of the corporation on February 28, 1998. This was the date, as ruled by court, that the oppression began. Adding attorney’s and expert's fees, the total award to Hollis was $792,915. The basic underlying principle here is that by virtue of the principles of laws governing the functioning of partnership firms, the plaintiffs have an option that they can exercise by virtue of which they can bring the chief partners to court not as part of the firm itself but as separate individuals. The idea essentially is to protect the interests of the minority shareholder against the dominance by the majority shareholder5. The claiming factor is that in case the majority stakeholder has stood in opposition to the beneficial treatment of the minority stakeholder, they stand in direct violation of the fiduciary duty they owe to the stakeholders of the company. This is applicable especially in cases where the organization is a closely held corporation. The duty that the majority shareholder has to the other minor stakeholders is therefore that much more significant in the eyes of the law because there can be an easy dominance of the interests of the minor partner in case his interests are not protected by law in the manifestation of fiduciary duty of care owed by the majority partner. In the case of Dharma, if Dharma can prove that her removal from the organization is unfair then the breach of fiduciary care automatically stands violated, because her removal from her post is in direct opposition to her interest as a minority shareholder in the firm. However, given the fact that Montgomery Enterprises has already made severance payment to Dharma and Edward Montgomery has offered to buy out Dharma’s part of the shares in the company at the market fair price value the claim of oppression would not find real favor with most courts? .In all probabilities the judgment of the court would be favoring an arbitration agreement in the case in keeping with the decisions in Lefkovitz v Wagner 395 F3d 773. 3. The most obvious reasons that Diane could have for questioning the validity of the board’s action is that fact that the meeting in which the proposal was passed did not have all the members of the board present. A decision of the magnitude that acquisition of another company is concerned, it would be ideal of the opinions, dissent and approvals of all the members of the boards were taken into account. Taken the dissent into account, the actions of the boards are still valid given the fact that the meeting had been conducted only by virtue of the fact that the quorum for a board meeting had been fulfilled. This means that 50% of the board members were present and of the company shareholders only one was absent, making the authority of the decision taken during the boards meeting to be standard and legal. A shareholder is entitled to appraisal rights and to obtain fair value of shares in the event of following course of actions6: 1. If the shareholder approval is required for merger and the shareholder is entitled to vote 2. If the corporation is a subsidiary In essence appraisal rights are guaranteed to all directors and minority shareholders in a where they have an objection to some corporate activities. This includes mergers and acquisitions. B) Directors and officers have their own way of dealing with individualized corporate law related matters. In Delaware law, therefore, the directors and the stakeholders are considered agents who bear the brunt of legal responsibility. State laws of Delaware recognizes the fact that the business and corporate matters of the companies that operate in the state, are handled in essence by and under the jurisdiction of its board of directors. This means in simple terms that the affairs and the management of the company is to be handled by the board of its directors [Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. 1985); 8 Del. C. § 141(a)]. The claim of violation of fiduciary trust that Diane wants to bring against the directors would be based on this basic definition of fiduciary duty. All directors were charged with an unyielding fiduciary duty to the company and its shareholders, in all the cases. A director’s fiduciary duties include both the duty of care and the duty of loyalty [Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006)]. This essentially means that the directors have an obligation to act in “good faith. If a director of a solvent corporation breaches his/her fiduciary duty to the corporation, under certain circumstances a shareholder of the corporation may assert a derivative claim behalf of the corporation against the director7. Diane in bringing the claim of fiduciary duty against the directors will have to prove that they failed in the performance of their fiduciary obligations, and the fact that they are selling the company to Concord is not in the overall interest of the business and the other stakeholders. She will also have to prove that the company is not in a strong enough position to take up the renovation scheme for the bar. The idea underlying the indictment in the claim trying to prove a breach of fiduciary trust is the fact that the transaction is governed by personal gains and biases, and that it has potential to cause harm to the corporate identity of the company and indirect harm to the other variables involved. The questions that could be asked here are the ones that were raised by Diane in the course of the board meeting itself. The reasons for Concord pushing the sale without detaiked assessment and analysis are definitely a grey area. In addition to the derivative action then, Diane can also seek remedies in litigation by, applying the involuntary dissolution of Cheerz given the fact that it is a privately held corporation. The burden of proof lies with Diane as she would have to provide just evidence that the grounds for the injunction is mismanagement and oppression. A shareholder’s direct claim includes a claim for a “special injury” or direct harm caused to the shareholder, while a derivative claim is a claim for the injury or harm to the corporation [Gentile v. Rosette, 906 A.2d 91 (Del. 2006)]. The chanced for this happening and the injunction filing breach of fiduciary duty are rare given the fact that recently, the Delaware Supreme Court had reversed the judgment in Lyondell Chemical Company v Ryan No 401, 2008, (Del. Mar.25, 2009)8. In case, the injunction goes through however, the directors could be saddled with personal liability that can result in civil and criminal proceedings against all those indicted9. C) Theoretically, the TBCA does not provide a standard definition of the constituents of duties of corporate directors. One has to keep going back to case law in order to understand what constitutes case law and the whether or not duty of fiduciary trust and a breach of that duty is part of a case in which counsel is sought. Texas case law recognizes the fact that law company directors owe a duty of obedience, a duty of care, and a duty of loyalty to the stakeholders of the company. This means that they need to manage the company in a manner that is suited to the overall growth and profitability of the organization and a step that leads to harm for the interests of the corporation and the stakeholders in general would mean a breach of this duty of trust and obedience. The cases that one could refer to here would be Gearhart Indus, Inc. v. Smith Int’l, Inc., 741 F.2d 707, 718 (5 Cir. 1984); FDIC v. Harrington, 844th F.Supp. 300, 306 (N.D.Tex. 1994) and Resolution Trust Corp. v. Norris, 830 F.Supp. 351 (S.D. Tex. 1993). The directors’ duty of obedience forbids ultra virus acts [Tex. Bus. Corp. Act arts. 2.01, 2.02, 3.02A(3)]. This is difficult to prove or to get an injunction. In fact it has been the usual practice for courts to refuse the imposition of personal liability on company directors for illegal or ultra virus acts, in their capacity of corporate agents until and unless it can be proved that the directors were direct participants in the act or had actual knowledge of the act [Resolution Trust Corp. v. Norris, 830 F.Supp. 351, 357 (S.D. Tex. 1993)]. The Fifth Circuit carried out an analysis of the duty of care that the director owed to the corporation under Texas law [Gearhart Indus., Inc. v. Smith Int’l, Inc., 741 F.2d 707 (5th Cir. 1984)]. In this analysis the 5th circuit states that “under the laws of most jurisdictions, the duty of care requires a director to be diligent and prudent in managing the corporation's affairs”- Ubelaker at 784. the case that defined fiduciary duty in such cases is McCollum v. Dollar, 213 S.W. 259 (Tex.Comm'n App.1919, holding approved). The case held that a director in any given corporate entity must carry out the fulfillment of his obligations in a manner that would be identifiable with that of an ordinarily prudent man under similar circumstances- Id. at 261. The question of director negligence is a question of fact and must be decided on a case-by-case basis. Id. “Texas courts hold directors liable for negligent mismanagement of their corporations, but the decisions do not specifically refer to such acts as violations of the duty of care, preferring to speak in general terms of directors as fiduciaries.” International Bankers Life Ins. Co. v. Holloway, supra; Tenison v. Patton, supra; Dowdle v. Texas Am. Oil Corp., 503 S.W.2d 647, 651. By this rationale, the directors at Cheerz would be accountable for the actions of the manager, especially in the light of the fact that they did not take care to ensure that there was no unfair advantage being taken by the manipulation of the media. This in fact would indict them in the unfair trade practices charge. But there can be no proof of the fact that the directors knew about the methods being used by the manager, so while their conduct is negligent, it cannot be clubbed under the breach of fiduciary duty of care and trust. The charge would stand in case the stakeholders were to bring in the lowered standards of food and services, but with respect to the conduct of the manager, the board cannot be held accountable, especially in the light of the fact that while the profits kept coming none of the stakeholders raised an issue of unfair means of management. 4) SMC had to do all of this instead of a direct tender offer to the stake holders because of the fact that in Texan law company takeover statues require approval to be received by the board before a tender offer can be made [Edgar v MIT Corp]10. The state has applied the statute with respect to takeover bids. This therefore would mean that SMC in order to advance tender notices to various stockholders of the firm would have to get an approval from the board and given the fact that the board was completely disinterested in letting SMC buy the firm out when they had the chance, trying to attain direct approval from the board would be impossible. This therefore left SMC with no choice but to pursue but to pursue a proxy campaign. The law governing this is the Williams’ Act that does not require regulatory approvals prior to the commencement of the claim, but does stipulate a full disclosure of the potential consequences to the target of a failure top receive such a proposal. B) SMC’s claims: A company that is under the Delaware Corporate law, section 203, is subject to certain expectations. The law prevents an interested stockholder (generally a person who owns or has the right to acquire 15 per cent or more of a corporation’s outstanding vote stock, or an affiliate or associate thereof) from engaging in a ‘business combination’ (defined to include mergers and certain other transactions) with a Delaware corporation for a period of three years following the date such person became an interested stockholder unless among other things, prior to such date, the board of directors of such corporation approved either the business combination or the transaction in which the interested stockholder became interested. The limitations f section 203 do not apply on the offer and merger given the fact that for purposes of Section 203, the Company’s Board has duly and validly approved the offer and the Merger pursuant to the terms of the agreement. The Texas laws on the amendment of the bylaws, which govern the workings of the company, and the amendment of the board clearly state that first and foremost the initial bylaws of a corporation shall be adopted by its board of directors. These bylaws may be made up of any given number of provisions that work toward the management and direction of the affairs that rule the inner workings of the company. These need to be such that they are consistent with law or the articles of incorporation. To this end the various sections of Texas law in Article 2 (23) state that: 1. A corporation's board of directors may amend or repeal the corporation's bylaws, or adopt new bylaws, unless the articles of incorporation or this Act reserves the power exclusively to the shareholders in whole or part; he shareholders in amending, repealing, or adopting a particular bylaw expressly provide that the board of directors may not amend or repeal that bylaw. 2. Unless the articles of incorporation or a bylaw adopted by the shareholders provides otherwise as to all or some portion of a corporation's bylaws, a corporation's shareholders may amend, repeal, or adopt the corporation's bylaws even though the bylaws may also be amended, repealed, or adopted by its board of directors. In keeping with these laws with respect to the inner workings of a business corporation and the manner of management that governs the company one has to necessarily observe the internal constitution of the company for a full analysis of the claims that SMC is making against the board of directors. The claims that have been made by SMC regarding the unfairness of the restructuring of the board so that Amore’s not only got time to mount an offensive but also frustrated the SMC bid to get more members on the Board are mostly dealing with the unfairness of the situation. These have no legal standing given the fact that the matters of restructuring of the board, elections and re-elections and other such internal related affairs are dealt with by the existing company constitution. There are two articles on the internal working constitution document that preserve the power of the Amore board, Article V states that , “The number of directors of the Corporation shall be fixed from time to time by a bylaw or amendment thereof duly adopted by the Board of Directors”. In fact Article VII of the constitution states clearly that “The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation”. The internal constitution of the company also states in article IX that, “The Board of Directors of the Corporation is expressly authorized to make, alter or repeal the Bylaws of the Corporation”. This would therefore mean that the board at Amore’s had the right to elect its board members and prevent the inclusion of the 4 additional members that SMC wanted. This was legal and there can be no fault found in these actions. This therefore would mean that much of the claims that have been put forward by SMC in a bid to get a hold on the Amore board is futile. It has also been accepted that an introduction of outsiders to the inner workings of a company’s board of directors symbolizes a reduction in the monitoring power of the board over top management11. The basic hypothesis that governs this notion is that the presence of outside directors on the board and the effectiveness of takeover markets are substitutes for each other. In the light of the fact that SMC and its management believed that Amore’s is in essence a badly managed company with potential and the take over bid that was mounted by them saw failure in the face of stiff resistance form the amore board and the media campaign that was led by the CEO, on can identify some actions that could now be taken by the present and existing board members of SMC to bring an indictment against the Amore management and ownership regarding a breach of fiduciary duty, trust and care. The idea would be to prove essentially that the board acted in a manner that does not promote the well being of the company or its stakeholders by preventing a selfish expansion of the board, thereby preventing SMC from getting any real strong hold in the management of the company. The fiduciary statues that govern the board are Directors must make decisions they believe are in the best interests of the corporation Directors must take into account interests of other constituencies. The claim of the minor partner oppression could be validated given the fact that SMC holds some shares and stake in Amore’s. This however needs to be carefully thought out and implemented by virtue of the fact that Amore’s as a group in its offensive and media statements had already publicized the fact that Amore’s dealt with work of sensitive nature and thus a partner or a takeover by a company with little or no experience in the management of the company could lead to the loss of prestige and respect that the company had accumulated over the years. In the light of the above presented facts therefore it would be advisable for the SMC board to let go of the idea of pursuit of an outright offensive with regard to the Amore and to keep making efforts towards the acquisition of the Amore stock if not through diurect tender then through a patience game. In the meantime, the claim of the mismanagement and the lack of efficient organizational capabilities of the controlling board need to be highlighted by the present SMC members on the Amore board thereby giving further weightage to the claim of breach of fiduciary duty. Reference: Egan B F, 2007, Director Fiduciary Duties under Delaware and Texas Law, pub, 20th Annual Conference on Securities Regulation and Business Law Problems Lipton M and Steinberger S, 1978, Takeovers and Freezeouts, pub, Law Catalog, pp373-375 Loos A and Pereira M A, 2006, Director’s Liability, pub, Kluwer Law International Publications, p104-106 Kaufer J and Rendell J, Keeping Current: Fiduciary Duty, pub, Business Law Today, Vol 18 No6 Directors’ and officers’ Liability, accessed August 10, 2009, < http://www.trafalgar-intl.com/d&o.htm> Moye J E, 2004, The Law of Business organization, pub, iChapters Publications, p687 Appeal from the US States District Court, Hollis v Hill No. 99-20725, for the 5th Circuit Mahler P A, 2006, Fiduciary Breach Can Result in Shareholder Oppression, But Is Shareholder Oppression a Breach of Fiduciary Duty?, accessed August 10, 2009, Cadwalader, Wickersham and Taft, accessed August 10, 2009, Tolmie F M, 2003, Corporate and personal Insolvency Law, pub, Routledge Cavendish publishers, pp362-363 Read More