Page 32 - Onboarding May 2017

to be informed of relevant facts. In re Caremark International, Inc. Derivative
Litigation, 698 A.2d 959 (Del. Ch. 1996).

x In Ash v. McCall, the court dismissed a claim that the directors failed to
adequately monitor the company’s financial reporting after a merger. When the
auditors informed the board of accounting irregularities, the board responded by
initiating an internal investigation that culminated in a series of earning
restatements, firing several senior managers, and creating a new executive
management structure.

D. The Duty of Loyalty

Historically, courts have found directors personally liable for breaches of fiduciary duty
for transactions in which directors have engaged in self-dealing at the expense of the
corporation and its shareholders. In cases involving director conflicts of interest, the
directors have the burden of proving the transactions were "entirely fair" to the
corporation and its shareholders.

x In Periera v. Cogan 294 B.R. 449 (S.D.N.Y. May 7, 2003), the court found that
directors who did not benefit personally from transactions they approved nevertheless
breached their duty of loyalty and were personally liable. The court found that (i)
without meeting to discuss or knowing what they were ratifying, the board
retroactively ratified past unilateral decisions by the company’s controlling
shareholder, CEO and Chairman of the Board to raise his own salary, and (ii) the
board declared dividends when the company was insolvent. The court based its
finding on the controlling shareholder's self-interest, the close relationships of the
board members to him and the complete lack of any exercise of diligence by the
directors in performing their duties.

E. The “Passive Director” and “Good Faith”

x In Stone v. Ritter, 911 A.2d 362 (Del. 2006), the Delaware Supreme Court resolved
uncertainty regarding what it means for a director to act in good faith.
x A director who fails to act in good faith breaches the duty of loyalty. Good faith
is not a stand alone fiduciary duty.
x Ignoring red flags -- “Where directors fail to act in the face of a know duty to act,
thereby demonstrating a conscious disregard for their fiduciary obligation, they
breach their duty of loyalty by failing to discharge that fiduciary obligation in
good faith.” Id. at 369.

x The good faith cases have generally involved corporations that have had to pay large
administrative penalties or “excessive” compensation.

x Paying $98.5 million to settle alleged violations of Medicare and Medicaid
reimbursement laws. Claims against the directors were dismissed and the
settlement approved. In re Caremark International, Inc. Derivative Litigation.

-3-