Brief Fact Summary. Plaintiffs, Bayer et al., filed a derivative shareholder action against Defendant directors, Beran et al., contesting their decision to pay for radio advertising that employed a director’s wife. Plaintiffs also argued that Defendants needlessly renew the employment contract of Dr. Henri Dreyfus.
Synopsis of Rule of Law. A director has a fiduciary duty to support the corporation’s interest over his or her own conflicting interests, and any competing interests renders the business judgment rule inapplicable.
Included within this rule's broad scope is every situation in which a fiduciary, who is bound to single-mindedly pursue the interests of those to whom a duty of loyalty is owed, deals with a person in such close relation to the fiduciary that possible advantage to such other person might consciously or unconsciously influence the fiduciary's judgment.View Full Point of Law
Issue. The issue is whether the Board, through Dr. Camille Dreyfus’ ties with his wife and his brother, breach their fiduciary duty of loyalty to the corporation by approving the radio deal and employee contract at issue.
Held. The court did give heightened scrutiny to the decisions of the Board that normally would be safely insulated under the business judgment rule. The radio agreement and the employee contract both withstand the scrutiny of analysis under the duty of loyalty standard. The radio advertising made sound business sense because the company had to increase their profile due to the FTC’s designation of celanese as a type of rayon. There was nothing exorbitant about the amount paid to Camille’s wife, and there was evidence, through the ratification by the board by renewing the advertising, that it worked. The employment agreement for Henri Dreyfus made sense as well because the agreement ensured that he would not work for any other company, and when the deal was considered as one part of the package paid to both Dreyfus brothers it was clear that the company received adequate compensation.
Discussion. The court emphasized that business decisions that would not typically merit an analysis under the normal business judgment rule will undergo more careful scrutiny when there is a conflict of interest. The duty of loyalty trumps the business judgment rule.