Question

Jimmy is the CEO of News Corp. His son, Johnny, runs Television Inc. One day Jimmy suggests that Johnny sell Television Inc. to News Corp. Jimmy and Johnny work together to radically inflate the value of Television Inc. Jimmy brings a proposal to the Board of Directors to buy Television Inc. for $500 million dollars even though the corporation is only worth $2 million. The board of directors diligently examines the transaction, but due to clever forgeries, the board does not discover the radical inflation of the corporation. Jimmy never discloses his relationship with Johnny. The sale goes through, and it is shortly discovered that Television Inc., is practically worthless.

A shareholder sues alleging that Jimmy violated his fiduciary duty of loyalty.

Additionally, the shareholder claims that the directors violated their fiduciary duties of care.

Is the shareholder correct?

Can you please make sure the answer is 400 words or more and needs to be presented in much detail thank you so much have a good day.

Answer 1

Under the U.S. legal system, a fiduciary duty is the legal term describing the relationship between two parties that obligates one to act solely in the interest of the other (Horton, 2016). Meaning that both the parties involved will be solely obligated to one another. Each person will look out for one another even if they do not make a profit. The scenario we willbe discussing is:Jimmy is the CEO of News Corp. His son, Johnny, runs Television Inc. One day Jimmy suggests that Johnny sell Television Inc. to News Corp. Jimmy and Johnny work together to radically inflate the value of Television Inc. Jimmy brings a proposal to the Board of Directors to buy Television Inc. for $500 million dollars even though the corporation is only worth $2 million. The board of directors diligently examines the transaction, but due to clever forgeries, the board does not discover the radical inflation of the corporation.Jimmy never discloses his relationship with Johnny. The sale goes through, and it is shortly discovered that Television Inc., is practically worthless.A shareholder sues alleging that Jimmy violated his fiduciary duty of loyalty.

The most important fiduciary duty is the duty of loyalty. The concept is simple: the decision makers within the company should act in the interests of the company, and not in their own interests. The easiest way to comply with this duty is not to engage in transactions that involve a conflict of interest. We often call these "self-dealing" transactions. The concept is that the directors are dealing with themselves, and may not reach an agreement that is fair to the company. In the United States, if a conflict-of-interest transaction is negotiated and approved by the noninterested directors, in a manner that approximates arms-length negotiations, including the right of the noninterested directors to reject the transaction altogether, the transaction is accepted unless a shareholder proves in court that the transaction is not entirely fair to the company. The burden is on the shareholder to show lack of entire fairness.

The second core duty of directors, in situations where they do not have a conflict of interest, is the duty of care -- the duty to pay attention and to try to make good decisions. I often encounter surprise about how little the duty of care requires the directors to do. They do not have to make sensible decisions. They only have to show up, pay attention, and make a decision that is not completely irrational.

The shareholder is absolutely correct as both the CEO has breached his duty of loyalty and the directors have breached their duty of care though unknowingly.