Term Paper on "Comparative Corporate Law"

Term Paper 14 pages (3809 words) Sources: 1+

[EXCERPT] . . . .

standard of conduct and standard of review in Corporate Law

This study concerns the duty of care in American corporate law vs. The duty of care in Australian corporate law. To fully understand that duty, it waxes absolutely essential to distinguish between roles, functions, standards of conduct, and standards of review.

'role' entails an organized and socially recognized pattern of activity in which individuals regularly engage. In organizations, for instance, roles take the form of positions, such as the position of the director.

'function' entails an activity that an actor is expected to engage in by virtue of his role or position in that organization. Critically, a standard of conduct enunciates the way in which an actor should play a role, act in his position, or even conduct his functions.

A standard of review, on the other hand, states the test that a court should apply when it reviews an actor's conduct - in our case, a director's conduct - so as to determine whether to impose liability, grant injunctive relief, or determine the validity of his actions.

In many or most areas of law, standards of conduct and standards of review tend to be confused among each other. For instance, the standard of conduct that governs automobile drivers is that they must drive carefully, and the standard of review in a liability claim against a driver is whether he did in all actuality and history drive carefully.

Much in the same manner, the standard of conduct that controls an agent who engages in a transaction with his principal is that the agent must deal fairly in all issues, and the standard of review in a claim by the principal against an agent, based on such a transaction, is whether the agent dealt fairly.

In fact, the conflation of standards of conduct and standards of review is so commonplace that it is quite simple to overlook the concept that whether the two kinds of standards are or should be absolutely identical in any given area is a matter of prudential judgment.

In a corporate world situation in which (i) information was perfect, (ii) the risk of liability for assuming a given corporate role was always commensurate with the incentives for assuming the role, and (iii) institutional considerations never required deference to a corporate organ, the standards of conduct and review in corporate law might actually be identical.

In the real world, however, these conditions seldom hold, and in American corporate law the standards of review pervasively diverge from the standards of conduct.

The difference is akin to perfect competition in economics studies: Perfect competition is assumed, but in all realty, perfect competition is never actually ideal, so the theories are subject to various differing parameters within the paradigm of the perfect competition function.

Historically, the two major areas of American corporate law that involved standards of conduct and review have been the duty of care and the duty of loyalty. The duty of loyalty entails the standards of conduct and review applicable to a director or officer who takes action, or fails to act, in a matter that does involve his own self-interest. (This can also be referred to as self-interested conduct.) The duty of care, on the other hand, concerns the standards of conduct and review applicable to a director or officer who takes action, or fails to act, in a matter that does not involve or entail his own self-interest.

Part 2: The Duty of Care in American and Australian Corporations

The Board of Directors at a company, whether Australian or American, sets the policy and direction of the corporation and is given the power and ability to elect and appoint officers and agents to act on behalf of the corporation, declare dividends, and act on other major matters affecting the corporation. In all actuality, the Board is ultimately responsible for the actions of the corporation.

From an even more basic standpoint, a director is a person appointed or elected, according to law, to manage and direct the affairs of a corporation or company. The whole of the directors collectively forms the Board of Directors.

One of the critical factors is the qualification of a director to act on behalf of the corporation. Only a real person may serve as a director. No business entity, whatever the form, may serve as a director.

The one other qualification to be a director in most states in America is one of age. When age is a requirement, the typical limitation is that the director be at least 18 years of age. But this is subject to state law and is not at all governed federally in America.

Directors of a corporation are not required to be shareholders, or reside in the state of incorporation.

The number of directors in each organization also does not really matter. Although not necessarily specifically stated in a state's corporation statute, it is understood that if your corporation has a single person who will be the officer, director, and shareholder, the corporation must still maintain all corporate formalities. A small corporation may have individuals who serve as officers, directors, and shareholders. If there will be more than one director for any corporation, it is best to have an uneven number of directors to promote taking action by majority vote.

Each state's corporation statute will set forth the minimum number of directors allowed. The Bylaws will set forth the number of the directors for a corporation, as well as define majority and quorum for voting purposes.

The initial appointment or election of directors is, to the contrary, extremely important. Directors are either named in the Articles of Incorporation or appointed by the Incorporator on formation of the corporation. After the initial appointment of the Board of Directors, directors will typically thereafter be elected annually. Except for the initial appointment of directors, the election or appointment of directors will be addressed in the corporation's Bylaws.

Interestingly, the Board of Directors itself sets its own compensation. The Board of Directors may vote to pay directors reasonable compensation for the work they do for the corporation. This compensation is separate from any compensation received by a director for work performed as an officer. Directors may receive a reasonable per-diem for attending meetings, which includes travel and lodging expenses, and may also be offered stock options as an incentive to successfully oversee the affairs of the corporation.

Most critically for this examination, there is the issue of responsibilities and duty of care for directors. The most important duty owed by a director to a corporation is the "Duty of Care." Most states define this duty in their corporation statute.

A typical corporation statute in a state either in American or Australia defining a director's duty of care provides that a director's duties must be performed, "with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances."

This duty of care is, as an analyst may assume, very broad, and requires directors to diligently perform their obligations.

At the heart of the duty of care is the business judgment rule. In fact, the "Business Judgment Rule" works in conjunction with the director's "Duty of Care." Under this rule, a director will not be held liable for mere negligence if exercising his or her "Duty of Care." The rule can be stated as, "A director who exercises reasonable diligence and who, in good faith, makes an honest, unbiased decision will not be held liable for mere mistakes and errors in business judgment." The rule protects directors from decisions that turn out badly for their corporation even where the directors acted diligently and in good faith in authorizing the decision.

Linked also to the duty of care is the duty of loyalty. The "Duty of Loyalty" exists as a result of the fiduciary relationship between directors and the corporation. A fiduciary relationship is defined as a relationship of trust and confidence, such as between a doctor and patient, or attorney and client. The nature of the relationship includes the concepts that neither party may take selfish advantage of the other's trust, and may not deal with the subject of the relationship in a way that benefits one party to the disadvantage of the other.

Basically, the bottom line is good faith. A director must perform his or her duties in good faith and in a manner in which the director believes to be in the best interests of the corporation and its shareholders.

Essentially, this duty means that while serving a corporation, the director must give the corporation the first opportunity to take advantage of any business opportunities of which he or she becomes aware that are within the scope of the corporation's business. If the Board of Directors chooses not to take advantage of a business opportunity brought to its attention by a director, the director may then go forward without violating his or her duty. So, essentially, it operates as… READ MORE

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