Book Opener

the approval of a majority of the directors or the approval of the shareholders,then the decision will stand.Fairness Rule The third condition that could allow a director’s decisionto stand despite a personal interest in the transaction is the basic fairnessof the decision to the corporation. If the director or officer has not met oneof the disclosure and approval requirements, then he or she has the burdenof proving that the decision is fair to the corporation. This requirementis called the fairness rule , but proving it can be a problem.The director or officer can try to show that the decision in questionwould have had the same conditions, prices, or terms if it had been madebetween two disinterested parties. (This is called dealing at arm’s length.)Beyond that, it is difficult to generalize about fairness, and most determinationsof fairness are made on a case-by-case basis. Nevertheless,two corollaries of the fairness rule have evolved.Insider Trading RuleAn insider typically is a corporate director or officer who has informationabout a publicly traded corporation that is not available to thepublic. He or she may not buy or sell shares in the corporation if the transactionis based on “inside” information. Any such transaction is referredto as insider trading and is unfair to the corporation and outsiders.Some examples of insider trading include buying or selling stocksjust before some major development occurs that will affect their price,or passing valuable information to an outsider who trades in the corporation’sstock and subsequently repays the insider. Under the insidertrading rules, directors or officers who possess inside information musteither refrain from acting on it or reveal it publicly before acting on it.Example 5. Ervin Edwards, CEO of Treen Corporation, foundout that Hiroshike Communications, Inc. planned to buy all ofTreen’s outstanding shares at a price far above the current marketvalue. Without revealing this inside information to the public,Edwards bought as much Treen stock as he could and resold it toHiroshike at an enormous profit. In doing so, Edwards violatedthe rule that forbids insider trading.RevealingRelationshipsMichael Appleby is oneof seven directors onthe board of OmegaCorporation. When theposition for chief financialofficer becameavailable, Michaellobbied for JoshuaStevens. Because ofMichael’s standing withother board members,Joshua was offered thejob. A year later, duringa conflict between theboard and Joshua, thedirectors discoveredthat Joshua and Michaelwere cousins. While norules were actuallybroken, the otherdirectors were angrythat this informationhad not been madeknown. Were Michaeland Joshua actingunethically? Why orwhy not?Corporate Opportunity DoctrineAnother extension of the duty of loyalty is the corporateopportunity doctrine . According to this doctrine, directors and officerscannot take a business opportunity for themselves if they have sureknowledge that the corporation would want to take that opportunity foritself. The directors must first present the opportunity to the corporation.If the corporation turns it down, then the directors or officers can takethe opportunity for themselves.Chapter 29: Operating a Corporation 637