Jimmy is the CEO of News Corp. His son, Johnny, runs Television Inc. One day Jim

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?

Explanation / Answer

Shareholders are correct that Jimmy violated his fiduciary duty of loyalty as he did not disclose the relationship with Jimmy and brings the proposal to the board of directors for an infltaed value by clever forgeries. Jimmy is liable to pay the damages to the shareholders on the breach of fiduciary duty.

On the other hand, the directors are not liable for the same, since the directors diligently examines the transaction, but due to clever forgeries, the board does not discover the radical inflation of the corporation. The intention of the board is not to defruad the directors and they tried their best to find the dilignecy. Hence the board of directors did not violated their fiduciary duties of care.

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