Financial Crisis & Corporate Governance. Financial Crisis & Corporate Governance. • 500 words for each question
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Director Liability Law/ Fiduciary Duty/ Breach Of Duty Care & Loyalty
Q1) Ethan, Joshua and Daniel are all directors of quality sofa & bed Ltd. The company desperately needed to purchase a warehouse. At a board meeting, Daniel successfully persuaded Ethan and Joshua that on particular warehouse was perfect for the company and that it was worth $140,000. Ethan and Joshua later discovered that Daniel was the owner of the warehouse and it was worth $145,000.
Daniel who is a chartered accountant, is in charge of insuring the company’s warehouse against burglary and fire. He signed an insurance form without checking the content of its policy. The warehouse was burgled and the company suffered a loss of $30,000. The insurance company claimed that the insurance policy did not cover burglary and therefore refused to pay.
Ethan and Joshua recently found out that Daniel offered a cheaper price to a company’s client, Paul Ltd, from which he obtained a personal benefit of $3,000.
Advise Ethan and Joshua as to whether Daniel breached any of his duties as a director of Quality Sofa & Bed. Discuss duty of care and duty of loyalty 350 words
Financial Crisis & Corporate Governance
Q2) The current financial crisis has shown that corporate governance failed to adhere to its objectives. Discuss the failures that were exposed in the prevailing corporate governance practices.
Q3) One of the attributes to the current financial crises is the failure of corporate governance principles and practices. Discuss
Rentier State Theory
Q4) Discuss how external rent influence the business behavior in a rentier state.
Q5) Discuss the impact of rentier economies on business environment.
Q6) Rentier State is an obstacle for business growth and development. ( Discuss )
Q7) The fact that Kuwait is a rentier state is impacting the business environment negatively.
Model of Professional Board
Q8)Legal systems and regulations can have a negative or positive influence on business. Discuss
On October 25 2011, the Chairman and directors of Petrotin (a Trinidad based oil company) was called on by the lawyers of the Ministry of the Attorney General to pay damages totalling $1.2 billion (US$190 million) within 28 days. The lawyers are alleging breach of duty of care in the GTL project, which in September had a project cost of US$136 million and the costs have now escalated to US$240 million. The board are accused of making decisions to continue the project by approving 33 payments related to a guarantee of the project without due diligence to determine if the company could afford the payments or if the project can be finished on time. This decision was taken despite enough warnings of the cost escalation dangers. The case also claims that there was no “proper and detailed front end engineering design and clear development verification of the process” which clearly pointed to a breach of the board’s responsibility to apply due diligence in its handling of risk.
Q9) What is the lesson learned from the cases
An article that appeared in the Washington Post on January 9 2005 reported that former directors of both Enron and World.com agreed to settle shareholders lawsuits out of their own pockets. WorldCom directors paid $18m and Enron’s paid $168m. These lawsuits claimed that the directors failed to “properly supervise executives” as an independent investigation concluded that even though the directors were unaware that the financial records were false, they “rarely challenged top executives or inquired seriously into the details of major transactions”. This case is significant because it set a strong precedent in relation to the minimum duty of care expected from directors to shareholders. The article stated that in the past, directors were protected from legal responsibility for bad decisions or frauds done by managers as long as the directors depended on the advice of gatekeepers. The settlement by these directors is regarded as legal exposure that will affect the ability of companies to attract and keep good directors.
Q10) What is the lesson learned from the cases
News Corporation is another major multinational company that is faced with questions about the lack of oversight by its directors. This case also involves the issue of separation of control from ownership as its CEO Rupert Murdoch is also the chairman of the group. In July of 2011 the group was faced with the scandal of phone tapping where it was found that victims of phone tapping had been “paid off” in 2007, but the CEO claims he did not about these illegal phone tapping activities. As well as this scandal, there is another law suit against News Corporation’s board for approving a $618m acquisition of a film production company wholly owned by the daughter of Rupert Murdoch. The article explained that the board’s role is a monitoring one and that it is the responsibility of the board to make sure there are systems for risk management and that the News Corporation’s board has “failed to discharge this duty”. The article also explains that the structure of the board may be a problem at News Corporation and needs to be changed. While they have started 3 separate enquiries into the phone hacking scandals, their actions are seen as “too little, too late”,
Q11) What is the lesson learned from the cases
Delaware Supreme Court created the “entire fairness” test almost 25 years ago for analyzing transactions where the controlling stockholder is involved as a party in both sides as a buyer and a seller of a transaction. In this case the transaction was the acquisition of a subsidiary that is wholly owned by the controlling stockholder . This test requires a controlling stockholder to show fair price and dealings. The responsibility of proving entire fairness shifts to a plaintiff under special circumstances where the transaction was approved by
a) the majority or a special committee of independent directors or
b) an informed vote of a majority of minority stockholders.
Applying the “entire fairness test” in the recent decision by the Delaware Chancery Court in relation to Southern Peru Copper Corp, the court found that the company’s “controlling stockholder breached its fiduciary duty when it forced a publicly traded company to pay for the controlling stockholder’s over priced subsidiary.” The court ruled for the payment of damages of $1.263 billion which is the second largest ever in the USA and the largest in the history of Delaware fiduciary duty cases. Despite the company’s poor performance i was found that the special committee and accountant worked hard to justify the inflated price of the acquisition of the subsidiary at the level originally demanded by the controlling shareholder. This case shows that a controlling stockholder’s proposal must find a balance between getting a fair value in this type of transaction without breaching its fiduciary duty.
Q12) What is the lesson learned from the cases
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Financial Crisis & Corporate Governance