Black-letter propositions
- 01
Care requires informed deliberation and reasonable attention; exculpation statutes may limit monetary liability but not all remedies or officers.
- 02
Loyalty addresses self-dealing, conflicts, corporate opportunities, bad faith, and improper entrenchment.
- 03
A conflict transaction can be cleansed through informed approval by disinterested directors or shareholders or fairness under governing law.
- 04
Corporate opportunity analysis considers line of business, expectancy, financial capacity, and use of corporate information; proper presentation can protect the fiduciary.
- 05
Oversight liability requires sustained failure or conscious disregard of monitoring or red flags, not ordinary business loss.
Use this attack sequence under time
Frame the issue
Identify fiduciary, beneficiary, and decision.
Resolve the next checkpoint
Classify care, conflict, opportunity, oversight, or good-faith issue.
Resolve the next checkpoint
Determine disinterest, information, process, and cleansing.
Resolve the next checkpoint
Apply business judgment only after prerequisites.
Finish the conclusion
State equitable and monetary remedies.
Common wrong turns
- A bad outcome is not itself a duty breach.
- Interested approval is not cleansing.
- Articles cannot eliminate loyalty or bad-faith accountability.
Worked example
A director buys an opportunity learned solely through board work without disclosing it, even though the corporation was considering expansion.
The opportunity likely belongs to the corporation; nondisclosure and appropriation violate loyalty unless the corporation validly rejected it after informed presentation.
Practice this topic
The business judgment rule
Cornell says the business judgment rule gives a director immunity from liability in duty-of-care suits if the director's actions fall within the rule. A court will uphold the decisions if made in good faith, with the care a reasonably prudent person would use, and with a reasonable belief the director is acting in the corporation's best interests. It is effectively a presumption in favor of the board.
The rule can be defeated by proof of gross negligence or bad faith, or of a conflict of interest, and when the corporation pleads it and the court finds it applies, the burden shifts to the plaintiff.
Care and loyalty
Cornell describes the duty of care in the corporate setting as requiring directors and officers to act in good faith, in a manner they reasonably believe to be in the corporation's best interests, and with the care an ordinarily prudent person would use. Courts generally do not review decisions that constitute a valid business judgment, one made by financially disinterested directors who were informed and acted in good faith.
The duty of loyalty requires directors to put the corporation and shareholders first, and directors must disclose conflicts so a disinterested vote can be taken.
Frequently asked questions
What is the controlling rule for care, loyalty, business judgment, and oversight?+
Business judgment protects informed disinterested good-faith decisions, not undisclosed conflicts, usurped opportunities, bad faith, or conscious oversight failures.
How should I analyze care, loyalty, business judgment, and oversight on the bar exam?+
Identify fiduciary, beneficiary, and decision. Determine disinterest, information, process, and cleansing. Apply business judgment only after prerequisites. State equitable and monetary remedies.
What is the business judgment rule?+
A presumption in favor of the board that protects a director from liability in a duty-of-care suit if the director acted in good faith, with care and in the corporation's best interests.
What three things must a director show under the rule?+
Good faith, the care a reasonably prudent person would use, and a reasonable belief that the director is acting in the corporation's best interests.
How can the business judgment rule be defeated?+
By proof of gross negligence or bad faith, or of a conflict of interest, according to Cornell.
What is a valid business judgment?+
One made by financially disinterested directors who became duly informed and exercised judgment in good faith to advance the corporation's interests.