PUERTO RICO Law and Practice Contributed by: Fernando J. Rovira-Rullán and Andrés I. Ferriol Alonso, Ferraiuoli LLC
must act on an informed basis, in good faith and in the best interests of the corporation, and must avoid conflicts of interest or self‑dealing. Note that the duties of care and loyalty have been expressly included in the General Corporations Act and that they also apply to managing members, man - agers and other officers of limited liability companies. The General Corporations Act also states that, besides directors and officers, the duty of loyalty applies to majority shareholders in transactions that represent a conflict of interest, thus providing an additional layer of protection to minority shareholders. In general terms, the duty of care requires that direc - tors and officers exercise their duties in a prudent and diligent manner, and with the same degree of attention and care as a competent and responsible director or officer under similar circumstances would act. In a merger or acquisition transaction, directors need to be well informed of all the material terms of the transac - tion and, if they are not familiar with them, they have the duty to make the necessary enquiries and become informed prior to making a decision. A corporation may limit or eliminate, via its certificate of incorpora - tion, the monetary liability of directors or managers for duty of care violations. On the other hand, under the General Corporations Act, the duty of loyalty requires that directors, offic - ers and majority shareholders act in the best interest of the corporation and its shareholders, and that they should not promote their own personal interest at the expense of the corporation’s interests. Complying with the duty of loyalty requires that directors act in good faith and in an honest and reasonable manner. Contrary to the duty of care, liability for a violation of the duty of loyalty cannot be limited or eliminated via the certificate of incorporation or an operating agree - ment. 8.2 Special or Ad Hoc Committees Although special committees are not generally con - stituted to evaluate a potential transaction, there are certain circumstances in which they might be advis - able. Special committees are formed when a director or a majority shareholder is on both sides of the pro - posed transaction or has other personal interests in
the transaction that could cause a conflict of interest and possibly an enhanced standard of judicial scrutiny of the transaction if it is challenged in court. 8.3 Business Judgement Rule The business judgement rule establishes a rebuttable presumption that a board of directors or an officer makes a decision in good faith, on an informed basis and with the honest belief that the decision was in the best interest of the corporation and its shareholders. The business judgement rule doctrine states that if there is any reasonable commercial basis for a deci - sion, directors will not be held liable for mere judge - ment errors even if those errors cause unfavourable results to the corporation. The rule does not apply to, and does not protect, directors or officers for ille - gal acts, ultra vires acts, fraudulent acts or acts that involve gross negligence, wilful misconduct or a clear conflict of interest. Delaware jurisprudence, which is highly persuasive in Puerto Rico, has established the following criteria to determine whether the business judgement rule is preserved: • the director or officer has no personal interest in the subject matter it is deciding; • the director or officer is sufficiently informed regarding the matter; and • the decision was made in good faith and rationally, and it was taken for the benefit of the corporation. When a director or officer has a conflict of interest, courts will use an “entire fairness” standard of review pursuant to which the directors and/or officers must prove that the decision was taken with the “utmost good faith” and that the decision is “inherently fair” to the shareholders. Under this standard of review, the directors and/or officers must show that the transac - tion was the result of “fair dealing” and that a “fair price” was obtained. Although Delaware courts have developed another standard of review called the “intermediate standard of review”, which is applied when a board of directors uses defence mechanisms such as a “poison pill” to prevent a hostile acquisition, this review has not yet been adopted by Puerto Rico courts. Under the inter -
1067 CHAMBERS.COM
Powered by FlippingBook