The Duty of Loyalty, Conflicts and Corporate Opportunity: every key term you need (+ practice quiz)
25 flashcard terms for Business Associations Topic 6, written to match the course framework. Study them here, then drill them as interactive flashcards, or test yourself with the 15-question quiz — free, no account needed.
A fiduciary must subordinate personal interest to the corporation's, avoiding self-dealing, competition, and appropriation of corporate assets or opportunities without informed corporate consent.
Interested director transaction
A deal between the corporation and a director, an entity the director controls, or a close family member, which is voidable unless cleansed by proper approval or shown to be fair.
Conflict safe harbor
Under DGCL 144 and the MBCA counterpart, a conflicted transaction survives if approved by informed disinterested directors, ratified by informed disinterested shareholders, or proved fair to the corporation.
Disinterested director approval
Approval by a majority of directors without a financial interest, after full disclosure of the conflict and material facts, which typically restores business judgment rule protection to the deal.
Shareholder ratification of a conflict
An informed vote of disinterested shareholders that generally shifts the burden to the plaintiff to prove waste, though a controller-side transaction is treated more skeptically.
Entire fairness standard
The most searching review, requiring the defendant to prove both fair dealing, meaning the timing, structure, negotiation, and disclosure, and fair price measured by financial considerations.
Fair dealing prong
Examines how the transaction was initiated, negotiated, structured, timed, and disclosed to the board and shareholders, including whether an independent committee had real bargaining power.
Fair price prong
Examines the economic and financial terms, drawing on asset value, market value, earnings, future prospects, and any factor bearing on the intrinsic worth of the shares.
Corporate opportunity doctrine
A fiduciary may not take for personal advantage a business opportunity belonging to the corporation without first presenting it and receiving an informed refusal from a disinterested body.
Line of business test
Treats an opportunity as the corporation's if it falls within an activity in which the company has fundamental knowledge, practical experience, and the ability to pursue and adapt.
Interest or expectancy test
An opportunity belongs to the corporation where it has an existing legal interest or a reasonable expectancy growing out of an existing right, such as a lease renewal or land the firm already uses.
Guth v. Loft
The Delaware case denying a president the right to keep a beverage formula opportunity he pursued with company funds and personnel while the corporation was financially able to take it.
Broz v. Cellular Information Systems
The Delaware decision holding that a director did not usurp an opportunity his company had abandoned and lacked capacity to exploit, though formal presentation remains the safe course.
Financial inability defense
A contested defense that the corporation could not have funded the opportunity; Delaware treats it as a factor rather than an automatic license for the fiduciary to take the deal.
Renunciation of opportunities
DGCL 122 lets a certificate or board resolution renounce classes of opportunities in advance, a device widely used by venture funds whose partners sit on many boards.
Constructive trust remedy
Where a fiduciary usurps an opportunity, the corporation may impose a trust on the property or its proceeds and take the wrongful gains rather than merely recover damages.
Competing with the corporation
A director may not run a rival business using the corporation's assets, workforce, or confidential information, and courts scrutinize even preparations made while still in office.
Controlling shareholder duties
A holder of majority voting power, or one who dominates the board in fact, owes fiduciary duties to the minority and may not use control to extract benefits not shared proportionately.
Sinclair Oil v. Levien
The Delaware case applying business judgment review to a parent's dividend and expansion policies but entire fairness to a contract breach where the parent received a benefit to the subsidiary's exclusion.
Self-dealing by a parent
Occurs where a parent causes the subsidiary to act in a way that gives the parent something the minority shareholders do not receive, triggering intrinsic fairness rather than deference.
Freeze-out merger
A transaction cashing out minority shareholders, historically reviewed under entire fairness because the controller stands on both sides of the deal.
Weinberger v. UOP
The Delaware decision adopting entire fairness with a flexible valuation approach for cash-out mergers and endorsing arm's length negotiation through an independent committee.
MFW framework
Business judgment review of a controller buyout conditioned from the outset on both an empowered independent committee and an informed majority-of-the-minority vote.
Executive compensation review
Pay set by disinterested directors receives business judgment deference, while self-set pay or awards to a controller are scrutinized for fairness or attacked as waste.
Duty of candor
When directors communicate with shareholders or seek their action, they must disclose fully and fairly all material facts within their control bearing on the decision.