A student Tuesday night was quite adamant that essay 4 could not be answered in 500 words. I agreed to post “my answer” to the essay although with a little trepidation. I do not expect students to give the answer of a polished attorney, nor does the bar exam. I remember when I took the bar review course, the instructor was telling us not to go past the time limit for the question (at that time 53 minutes) no matter what. He joked, “You couldn’t copy the model answer in 53 minutes!” A passing answer on the bar exam is the answer of a person with a basic understanding of the rule and the ability to use the facts given and the rule to reach a conclusion. In class I go off many different directions trying to give the student a sense of all the possibilities suggested by the rule being discussed. That is not required to get a passing grade on an exam.
My Answer to Question 4
What should Frank do at the board meeting tomorrow? How would your advice benefit him?
Frank should attend the meeting, read the reports, listen to the discussion, ask questions and do his best – do what a reasonably prudent person would do under the circumstances. That is called care in the process. If there is no conflict, fraud, illegality, waste or bad faith, the business judgment rule will protect him if his decision turns out to be a mistake.
As to the first issue, the contract with the coaches, Frank will be receiving money from the corp if approved by the board. That makes it an interested director transaction as to him. That implicates his duty of loyalty. He cannot unreasonably benefit at the expense of the corporation. He should disclose that he will be benefiting from the contract and step out of the room, not vote or deliberate. That is called the safe harbor. If he does that, the court will later presume that the transaction as to him was fair to the corporation. The transaction can still be set aside if it is later determined to be unfair to the corp.
If Frank chooses to stay in the room and vote on the measure, the transaction will be presumed to be unfair and he will not be able to use the BJR as a defense because he has a conflict. The thing he is voting on benefits him personally. That means that he will have the burden to show at trial that he used good faith business judgment and reasonable care.
As to whether $10,000 to a coach is fair is impossible to tell on these facts. If the coaches are doing nothing for the $10,000, it is not fair and is probably waste.
As to issue 2, Frank is getting no benefit from the corp therefore there is no issue of loyalty as to Frank. He can stay in the room, deliberate and vote to his heart’s content. If the contract turns out to be a mistake, the BJR will protect him unless his relationship with Billy creates a conflict. If so, the BJR would not apply and he would have to establish that he used good faith business judgment in making the decision. I don’t think a close relationship creates a conflict without something more suggesting that Frank really was not making an independent choice. If Frank is somehow getting a benefit from the corp, then that benefit will have to be returned to the corp if it turns out to be unfair to the corp. If Frank is getting a benefit from Billy for his choice, that does not create a breach of loyalty but probably does create a conflict which would mean the BJR does not protect him as to that decision.
By the way, (again) on D2L I have posted a file called Exams and Analysis. It has every final exam I have given along with my analysis and some commentary on student answers. It also has 17 Cal Bar Exam Biz Org questions with my analysis on about half of those (it’s a work in progress). I am adding the mid-term exams as I get a chance to work on it.