Refusal to Operate in the Low-Priced End of the Market
Alex and Baker's decision to refuse to operate in the low-priced end of the market is protected under the business judgment rule (BJR). This rule shields board members from liability for decisions made in good faith, with the care that a reasonably prudent person would use, and with the belief that the decisions are in the best interests of the company.
Alex and Baker, as directors of Pick, had the discretion to make subjective judgments about market profitability as long as these decisions were not excessively arbitrary or capricious. Here, their refusal to focus on the low-priced end of the market was based on an evaluation of market conditions, which they believed mirrored the overall decline in the stock market, seemed to fall within the scope of the BJR.
Furthermore, their decision was informed by hiring an analyst just two months prior. This analyst examined the potential of entering the low-priced market segment and concluded that it was not a profitable avenue for the company. By relying on this professional analysis, Alex and Baker demonstrated due diligence and a reasonable basis for their decision, fulfilling their duty of care as directors.
Thus, simply choosing not to pursue the low-priced end of the market does not constitute a violation of their responsibilities or breach of their duty of care.
Denying Written Demand That the Board Take Remedial Action
The protection of BJR is not absolute. Directors may still be held personally liable if they refuse to take actions that are clearly beneficial to the company based on improper motives or without a reasonable basis.
In this instance, we lack detailed information on how the Board arrived at their decision or the specific reasons behind their refusal to take remedial action concerning E-Save. If the Board reasonably believed that taking action against E-Save would somehow harm Pick, perhaps by triggering costly litigation or reputational damage with little chance of success, their decision could be defended under the business judgment rule.
It is also important to consider the internal dynamics of the Board's decision-making process. Without knowing whether the vote was unanimous or split, it is possible that Alex or Baker, dissented in the decision. If this were the case, the dissenting director might not be held personally liable even if the decision falls outside the protection of the BJR.
To conclude, determining whether Alex and Baker should be held accountable for the Board's decision requires more information.
Duty of Care
As discussed above, Cate, like other directors, is generally protected under the BJR. Moreover, even if the decision to refuse to operate in the low-priced end of the market turns out to be an arbitrary mistake which does not shield from the BJR, Cate opposed that decision, and therefore, she is not personally liable.
However, BJR does not apply to or protect directors who: (1) have a conflict of interest; (2) not act in good faith; or (3) engaged in fraud or illegality.
Here, if Cate participated in denying the shareholders' written demand that the Board take remedial action, she is less likely to be protected by the BJR. Cate has an inherent conflict of interest, as she personally formed E-Save. Her involvement in this decision could be construed as self-serving, potentially prioritizing her interests over those of Pick. Therefore, Cate's actions could potentially lead to a violate of duty of care if it is determined that her decision-making was influenced by conflicting interests rather than Pick's interests.
Duty not to compete
The duty of loyalty requires that a director or officer not compete with the corporation or pursue opportunities that belong to the corporation. A corporate opportunity is any opportunity that the corporation has an interest or expectancy in. However, one may pursue a corporate opportunity if they: (1) first present it to the Board; and (2) the Board decides not to pursue the opportunity.
In this case, Cate did present the opportunity to focus on the low-priced end of the market to Pick's Board, but the Board chose not to pursue it. Therefore, Cate might argue that her decision to start E-Save does not violate her duty of loyalty, as she followed the necessary protocol by first offering the opportunity to Pick. The shareholders might contend that even though it initially declined to focus on the low-priced market, this segment still falls within Pick's line of business, and Cate cannot independently start a competing venture without first resigning from the Board.
The outcome primarily depends on the specific facts, but courts are likely to find that Cate should not have started a company that directly competes with Pick's business, particularly because it clearly overlaps with Pick's potential business interests, even though her proposal to focus on this market segment was rejected by the Board.
Duty to Refrain from Voting on Decisions with Conflicts of Interest
Even if Cate did not violate the prohibition against competing with the company, her participation in the decision to deny remedial action, if she was involved, would indeed constitute a violation of her duty of loyalty. This duty prohibits a board member with a conflict of interest from voting on matters in which they are conflicted. Consequently, her vote should be deemed invalid, and she may be personally liable for any resulting damages due to her conflicted involvement in the decision.
(850-900 words)