DISCLOSURE OF MATERIAL FACTS

 

The duty of disclosure is a component of the duty of loyalty, but it also implicates the director’s obligation to act with due care and in good faith. As part of the duty of care, a director should reveal all relevant material information that he possesses about a transaction to all who are in the position of making a decision about that transaction. The director has a duty to make an informed decision because ultimately it will affect the corporate interest and welfare. When the director has a conflict of interest or perceives a conflict of interest relative to a corporate interest or transaction, he must disclose all known material information that relates to the conflict of interest and/or transaction. The duty of disclosure is implicated in any decision-making process, but particularly applies when stockholder action is required. The scope of the information that must be disclosed is any information that a reasonable person would consider important under the particular circumstances when deciding how to vote on the transaction.

 

 

A director may be held liable for a breach of the duty of loyalty if he fails to disclose any actual or potential conflicts of interest relative to a transaction. Other directors who participate in the decisionmaking process are also vulnerable if they knew or should have known of the conflict of interest. Courts will look to the timing of the transaction, its structure, and the level of disclosure. If a conflict of interest existed at the time the transaction occurred, the transaction is not necessarily voidable if it was fully disclosed to the board before the decision was rendered. Shareholders’ ratification of a decision following full disclosure may not be voidable if the decision or transaction ultimately proves fair to the corporation and the shareholders.

 

 

A plaintiff who alleges a breach of the duty of loyalty by failure to disclose must establish that the failure to disclose would have significantly altered the decision-maker’s process or deliberations. As one court stated, “a faulty disclosure claim must establish a ‘substantial likelihood’ that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable stockholder.” Misleading or partial disclosures have been held insufficient to meet the disclosure requirement because the shareholders did not receive a “total mix” of information to make an informed decision. Where the plaintiff offers sufficient evidence that a director failed to disclose complete and material information regarding a conflict of interest, many courts take the view that the burden of proof shifts to the director to prove the fairness of the transaction. Ultimately, the duty of loyalty is not breached if the plaintiff cannot show actual injury or prejudice as a result of the director’s failure to disclose complete information.

Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.

 

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