Officers Duties

9. Officers Duties

1. Care,Loyalty,Corporate Opportunity

An officer owed the same duty of care and loyalty to the corporation as does a director and he must treat any corporate opportunity of which he becomes aware in the same fashion as a di­rector does. With respect to actual or threatened action against an officer arising out his status as an officer,the corporation has the same powers to indemnify the officer and purchase insur­ance on his behalf as it does for directors.

2. Duties of Controlling Shareholders

A controlling shareholder of a corporation is someone who has a sufficient percentage of share ownership, compared to any other holders of the corporation’s shares, that he can effec­tively determine the composition of the board of directors. In a publicly - held corporation with generally fragmented share ownership pattern, a person holding 20% -25% of the shares of the corporation may be its controlling shareholder.

3. Duty to Investigate Purchaser

A seller of a controlling block of shares has been held in some cases in other jurisdictions to owe a duty to the corporation to make a reasonable investigation that the buyer does not in­tend to" loot" the corporation. However,the dominate rule appears to be that there is no such duty unless the selling shareholder is on notice of circumstances indicating that the buyer in­tends to loot or otherwise harm to the corporation.

4. Corporate Opportunity

If,but for the sale of a control block of shares,a corporation could have entered into a favor­able transaction, the corporation may be able to claim for itself the control premium obtained by the shareholder under the theory that the selling shareholder usurped a corporate opportunity.

An example would be where a purchaser was very interested in controlling the assets of the corporation and was willing to pay a substantial premium to do so whether by purchase of the assets themselves or by purchase of a control number of shares. If the seller has not sold the shares, the corporation would have instead received the premium by selling the purchaser its as­sets. However,if the controlling shareholder notifies the corporation of the opportunity and does not as a director participate in a decision to accept or reject the opportunity, it would probably not constitute a breach of duty to vote against corporate acceptance of the opportunity as a shareholder. Shareholder rejection of,for example,a merger opportunity might then be followed by a sale of the control block of shares at a control premium.

10. Management

1. Business Judgment Rule

Although not labeled as such,the 1986 statute appears to have codified a version of the business judgment rule.

The statute provides that a director is not liable for an action or for a failure to act unless the director has breached the duty of care and "the breach or failure to perform constitutes will­ful misconduct or recklessness. " This standard resembles the version of the business judgment rule recently adopted by the Delaware courts which effectively transforms the" ordinary care" standard into a" gross negligence" standard. However, the official comments to the statute indi­cate that something more than gross negligence is necessary, as recklessness requires a con­scious'indifference to risk.

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2. Deadlocks GEARING v. KELLY

Court of Appeals of New York, 1962 11 N. Y.2d 201,227 N. Y S.2d 897,182 N.E.2d391

Per Curiam.

Appellants,who own 50% of the stock of the Radium Chemical Company, Inc. ,seek, within the provisions of section 25 of the General Corporation Law,c. 23,to set aside the elec­tion of a director.    ■

_f In a proceeding under that section, the court sits as a court of equity which may order a new election" as justice may require. "We have concluded, as did the majority of the Appellate Division that appellants have failed to show that justice requires a new election, in that they may not now complain of an irregularity which they themselves have caused.

Mrs. Meacham stayed away from the meeting of march 6,1961 for the sole purpose of pre­venting a quorum from assembling,and intended,in that manner,to paralyze the board. There can be no doubt, and indeed it is not even suggested that she lacked notice or any manner found it temporarily inconvenient to present herself that particular time and place. It is certain, then,that Mrs. Meacham’s absence from the noticed meeting of the board was intentional and deliberate. Much is said by appellant about a desire to protect their equal ownership of stock through equal representation on the board. It is,however,clear that such balance was voluntarily surrendered in 1955. Whether this was done in reliance on representations of Kelly,Sr. ,as al­leged in the plenary suit, is properly a matter for that litigation, rather than the summary type of action here.

The relief sought by appellants, the ordering of a new election, would, furthermore, be of no avail to them,for Mrs. Meacham would then be required,as evidence of her good faith,to at­tend. Such a futile act will not be ordered.

The identity of interests of the appellants is readily apparent. Mrs. Gearing has fully in­dorsed and supported all of the demands and actions of her daughter, and has associated herself with the refusal to attend the directors’ meeting. A court of equity need not permit Mrs. Gearing to attack actions of the board of directors which were marred through conduct of the director whom she has actively encouraged. To do so would allow a director to refuse to attend meeting, knowing that thereafter an associated stockholder could frustrate corporate action until all of their joint demands were net.

The failure of Mrs. Meacham to attend the directors’ meeting, under the present circum­stances, bars appellants from invoking an exercise of the equitable powers lodged in the courts under the statute.

The order appealed from should be affirmed,with costs.