Please go into detail Jimmy is the CEO of News Corp. His son, Johnny, runs Telev
ID: 409472 • Letter: P
Question
Please go into detail
Jimmy is the CEO of News Corp. His son, Johnny, runs Television Inc. One day Jimmy suggests that Johnny sell Television Inc. to News Corp. Jimmy and Johnny work together to radically inflate the value of Television Inc. Jimmy brings a proposal to the Board of Directors to buy Television Inc. for $500 million dollars even though the corporation is only worth $2 million. The board of directors diligently examines the transaction, but due to clever forgeries, the board does not discover the radical inflation of the corporation. Jimmy never discloses his relationship with Johnny. The sale goes through, and it is shortly discovered that Television Inc., is practically worthless.
A shareholder sues alleging that Jimmy violated his fiduciary duty of loyalty.
Additionally, the shareholder claims that the directors violated their fiduciary duties of care.
Is the shareholder correct?
Explanation / Answer
As per the corporate law, directors and CEOs of firms should discharge two primary fiduciary duties (Park, 2011):
The fiduciary duty makes the responsible party to act for someone else’s benefit and it is applied over the directors because shareholders trust them with their investments.
Here in the case scenario, shareholder can sue Jimmy for violation of fiduciary duty of loyalty because he worked against the interest of the corporation. He didn’t refrain himself from taking the step that injured the corporation and stakeholders financially.
Most of the decisions of the court are taken from the perspective of the business judgment rule, but for the breach of duty of loyalty, the court doesn’t apply this rule. Fraud, bad faith and any other negative move in favor of self interest that damages the interest of shareholders nullifies the presumption of the business judgment rule.
If successfully claimed, Jimmy will be liable for the profits received, all damages caused because of the breach and punitive damages. Jimmy as a CEO was responsible for keeping the interest of shareholders above his own interest. The statute of limitation ensures the claim is raised within 3 years of finding of wrongful act.
The other case, where the shareholder sues the directors for violation of fiduciary duty of care will be dismissed, because the evaluation of duty of care is done by the business judgment rule. The business judgment rule helps judiciary in determining whether the directors have taken the business decision in good faith and after analyzing all the potential alternatives. Here in the case scenario, the directors had a good look over the proposal, but unluckily it was forged in a way that none of them were able to determine any kind of risk. Directors played their role responsibly, so the shareholder’s claim against the directors will not be entertained (Park, 2011).
Though to be successful in his claim, shareholder needs to prove that the directors failed in their take of investigation, which will not be possible because directors participated in meetings before taking the decision and have investigated (Stirling, n.d.). They weren’t aware of the relation between Jimmy and Johnny, which could have made them negligent or favor the decision to help Jimmy.
The court will ensure whether the board adopted an ethics policy in decision making and was certain that the decision will benefit the shareholders first. If the ethics were followed than under the business judgment rule, directors will be refrained from any kind of personal liability because of the assumption that decisions were taken in good faith. The Davis-Stirling act is applicable to the board members according to which the board members are not personally liable for the damages unless it is considered as grossly negligent. It’s up to the court whether they consider the event as grossly negligent, but according to me after analyzing the evidence, I believe the court will rule out in favor of directors, but against the CEO Jimmy and he will be held personally liable.