Question

1. Larry and Gary are two of the three directors of Scary Inc., a corporation which owns a local music club. Without informing Scary’s third director, they secretly vote to enter into a very lucrative contract to purchase all of the club’s alcoholic beverages from “Bloody Mary’s Inc.,” a liquor distributor owned by their sister, Mary. Relying solely on Mary’s representations, Larry and Gary believe that Mary’s prices are fair and competitive. In fact, her prices turned out to be higher than most other local distributors, resulting in significant lost profits for Scary. When Scary’s shareholders learned of the contract with Mary, they sued Larry and Gary personally for damages. If Larry and Gary raise the Business Judgment Rule as a Defense:

i) Explain what elements are generally necessary for the Rule to apply?

ii) Will the Rule protect Larry and Gary from Liability? Why or why not?

Answer 1

answer-

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1- The Elements that are generally necessay for the Business Judgement rule to Apply are-

Good Faith element- This is the first and very important element which says that business decisions must be made in good faith. There is no hidden agenda or biases present in the decision.

Best interest of the company- Directors have fiduciary duty to make sure that they manage the business which benefit the company. Their decisions should be in the best interest of the company. In the honest belief that that the action was taken in the best interest of the company.

On the informed decision- Directors have the duty to gather all the information with due dilligence before making the decision especially those which are very critical for the company's profit or loss. they must done full research then make decisions.

No Conflict of interest- There was no conflict of interest between the director's personal interest and the interest of the corporation.

No this rule will not protect Larry and Garry from liability because First they failed to do informed decisions. If they could have just research the market before taking the decision then they would have found out that Mary's prices are higher then other competitors.

Second, they let their personal relationship come over than the best interest of the company. Mary was their sister so they had conflict of interest on the basis of personal relationship.

In short this rule will not protect them.