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How Should Directors Handle Personal Interests That Conflict with Corporate Interests?
Patrick V. Allen
United States District Court, S.D. New York
355 F. Supp. 2d 704 (2005)
RPO, a privately traded corporation, rented land to a private golf course of which several of RPO’s directors were members. The directors charged the golf course enough rent to cover only the property taxes on the land. Patrick, a shareholder of RPO, brought a suit against the directors of RPO, alleging that RPO’s directors breached their fiduciary duty of loyalty to the corporation by failing to maximize the value of the corporation for shareholders. The directors argued that they were exempt from liability under the business judgment rule. (The business judgment rule is covered in the section entitled “Liabilities of Directors, Officers, and Shareholders,” which follows shortly.)
The U.S. District Court for the Southern District of New York ruled against the RPO’s directors, holding:
The business judgment rule will not protect a decision that was the product of fraud, selfdealing, or bad faith. Directors may benefit from the rule only if they possess a disinterested independence and do not stand in a dual relation which prevents a nonprejudicial exercise of judgment. It is black-letter, settled law that when a corporate director or officer has an interest in a decision, the business judgment rule does not apply. . . . A director is considered interested in a transaction if the director stands to receive a direct financial benefit from the transaction which is different from the benefit to shareholders generally. . . . The duty of loyalty requires a director to subordinate his own personal interests to the interest of the corporation.