Portfolio : The Board of Directors

I. Introduction

II. The Role of the Board in Corporate Governance 1
II. Introductory Material
A. What Duties Does a Director Owe?
B. To Whom Does a Director Owe Duties?
C. The Traditional Model and the Rush to Other Constituencies
D. The Closely Held Corporation

III. Structure of the Board
A. Introduction
B. Sarbanes-Oxley Act of 2002
1. Bans on loans to executive officers and directors
2. Audit committees
C. Election of Directors
1. Voting standard in the election of directors
2. Shareholder proposals and proxy statements
3. Elimination of discretionary voting by brokers in director elections
D. Size of the Board and the Terms of Its Members
E. Composition of the Board
1. Corporate governance guidelines regarding board composition
2. Director independence
3. The lead director
F. Committees
1. Permissible scope of committee activity
2. Reliance on committee actions and recommendations
3. The audit committee
4. The compensation committee
5. The nominating committee
6. The executive committee
G. Board and Director Evaluations

IV. Duties and Liabilities of Individual Board Members
A. Duties of Board Members
1. Duty of loyalty and ‘interested’ transactions
a. Duty of loyalty
b. ‘Interested’ transactions
c. Use of independent committees in interested transactions
d. Usurpation of corporate opportunities
2. Duty of care and reliance upon experts
a. Duty of care
b. Reliance upon experts
3. Duty of full and fair disclosure
4. Duties in exceptional circumstances
a. Duties in the face of a takeover proposal
(1). Does the bid present a ‘danger to corporate policy and effectiveness’?
(2). Is the board’s response ‘reasonable in relation to the threat posed’?
b. Duties in connection with the sale of the company
(1). The directors’ duties in the sale of control
(2). The discharge of the directors’ duties when the sale of the company is inevitable
c. Auctions
(1). The openness of the auction
(2). The auction's rules
(3). Ending the auction: ‘lock-up’ and ‘no-shop’ provisions
d. Selling control other than through an auction
e. Duties during the conduct of a proxy fight or written consent contest
B. The Business Judgment Rule
1. The nature of the rule
2. The prerequisites for invoking the rule
a. Action by the board
b. Disinterestedness of the directors
c. Due care
d. The requirement of good faith
3. The Delaware modification of the rule and other approaches to business judgment in the takeover context
C. Statutory Liabilities of Directors; Risks of Liability Under the Environmental Laws

V. Indemnification, Exculpation, and Liability Insurance
V. Introductory Material
A. Statutory Indemnification
1. Delaware law
a. Mandatory indemnification
b. Permissive indemnification
(1). Director or officer status
(2). `Good faith'
(3). `Reasonable belief'
c. Advancement of expenses
d. Exclusivity
2. Model Business Corporation Act
3. Status suits
4. Public policy
B. Contractual Indemnification
1. Independent legal ground
2. Public policy
3. Typical provisions
C. Exculpation
1. Statutory provisions
2. Limitations
D. Directors’ and Officers’ Insurance
1. The need for insurance
2. Typical policy, exclusions, and other common limitations
3. Practical considerations

VI. Derivative Litigation: Managing a Unique Corporate Asset
VI. Introductory Material
A. The Nature of Derivative Litigation
B. The Demand Requirement
1. Demands excused as ‘futile’
a. Interestedness and lack of independence of directors
b. Valid business judgment
2. ‘Wrongfulness’ of the board’s refusal to litigate
C. The Role of the Pre-Suit Investigation Committee
1. The task and composition of the committee
2. The work of the committee
3. The role of the full board
D. The Role of the Post-Filing or Zapata Committee
1. Context and legal analysis
2. The work of the committee
a. The merits of the claim
b. The injury to the corporation
c. The costs of prosecution
d. The effect on operations
e. Cost-benefit analysis
f. Knowledge and motivation of the directors
g. The effect of remedial action
E. Consequences and Pitfalls of Using the Committee Process
1. ‘Structural bias’—skeptical views of the committee process
2. Scope of the authority delegated to the special committee
3. Uncovering wrongdoing during the investigation
4. Waiver of the attorney-client privilege
F. The Burden of Proof and Permissible Discovery on Motions to Dismiss by a Special Litigation Committee
G. Discovery in Demand-Refused Cases

VII. Corporate Governance of the ‘Troubled’ Company 1
VII. Introductory Material
A. Duties of Directors of a Solvent Company
B. Fiduciary Duties of Directors of a Financially Troubled Company
1. Duty of loyalty: To stockholders or creditors?
a. To whom are fiduciary duties owed?
(i). The roots of the ‘trust fund' doctrine and its application in New York
(ii). Delaware law and the trust fund doctrine
b. The relevance of the ‘vicinity or zone of insolvency'
c. Balancing competing interests of the various constituencies
2. Determination of insolvency and vicinity of insolvency
a. ‘Vicinity or zone of insolvency'
b. ‘Insolvency in fact'
3. The business judgment rule
4. Exculpation
5. The doctrine of ‘deepening insolvency'
C. Governance in Bankruptcy
1. Formulating the plan of reorganization
2. Operating the debtor in possession
3. Recovering the assets of the estate
D. Fights for Control of a Bankrupt Company
1. Proxy fights
2. Takeover of a bankrupt company
E. Restructuring Corporate Governance Pursuant to a Reorganization Plan