EB5 Investors Magazine "Top 25 issue" Volume 9 Issue 1 - Page 19

The issue of corporate governance is important even in the case where the offering documents were well prepared .
As fiduciaries , corporate directors , managers and general partners owe their entities , and their shareholders , members or limited partners , the fiduciary duties of care ( or diligence ) and loyalty ( or fidelity ) in performing their corporate duties . As noted by the Delaware Court in Shoen v . SAC Holding Corp .: “ In essence , the duty of care consists of an obligation to act on an informed basis ; the duty of loyalty requires the board and its directors to maintain , in good faith , the corporation ’ s and its shareholders ’ best interests over anyone else ’ s interests .” As such , it is not surprising that lawsuits asserting corporate misconduct are likely based on alleged breaches of the duty of care and / or the duty of loyalty . However , because the relationship between the Fund managers and the NCE is largely based on contract ( that , is the LP or LLC agreement ), the first thing we must do is review the applicable operative document to ascertain what duties are owed and if any have been permissibly waived . At least , you can be sure that a litigator will certainly start there and so should we . And hopefully the problem will not be compounded where there is a waiver of the duties that is buried in the documents , raising an adequate disclosure or even adequate waiver issue .
Importantly , it should be noted that absent self-dealing , there should be few limits as to the NCE manager ’ s selection of a redeployment project . But what does this mean ? Well , by being careful and acting on an informed basis ( in other words by exercising its duty of care ), the NCE manager may have plenty of latitude on its redeployment plans . On the other hand , if the NCE manager has a conflict of interest ( think duty of loyalty ), then one can be assured that the “ conflicted ” redeployment choice will be subject to heightened scrutiny .
In addition to ensuring that the corporate and offering documents provide the needed authority to redeploy , the NCE manager should still seek further protections and assurances to enhance the possibility that it will be shielded from redeployment related liability . This it can do by relying on the advice and opinion of professionals it has engaged . If done correctly , the NCE manager may have the protection afforded by the ever-important business judgement rule .
The business judgment rule is not a standard of conduct , but rather a defense the NCE manager may raise ; it is a standard of judicial review of corporate conduct . In other words , the business-judgment rule insulates directors from liability so long as the directors acted in good faith , without conflicts of interest , and did what they believed to be in the best interest of the corporation . As the court in Berg & Berg Enterprises v . Boyle found , “ the business judgment rule has two components — immunization from liability …. and a judicial policy of deference to the exercise of goodfaith business judgment in management decisions .” The rule requires judicial deference to the business judgment of corporate directors so long as there is no fraud or breach of trust , and no conflict of interest exists .
But as noted , the business judgement rule becomes inapplicable where there is a conflict of interest and instead the “ entire fairness standard ” may come into place . According to the Delaware Chancery Court [ in Encite LLC v . Soni , C . A . No . 2476-VCG ( Del . Ch . Nov . 28 , 2011 )], under this standard the burden is on the director defendants to
" The business judgment rule is not a standard of conduct , but rather a defense the NCE manager may raise ; it is a standard of judicial review of corporate conduct ."
establish “ to the Court ’ s satisfaction that the transaction was the product of both fair dealing and fair price .” Although fair dealing and fair price concerns are separate lines of inquiry , the determination of entire fairness is not a bifurcated analysis . Citing recent cases , the Delaware Chancery Court acknowledged that “ at least in nonfraudulent transactions , price may be the preponderant consideration . That is , although evidence of fair dealing may help demonstrate the fairness of the price obtained , what ultimately matters most is that the price was a fair one .” The Delaware Chancery Court further explained that the entire fairness analysis requires a transaction to be objectively fair and that “ the board ’ s honest belief that the deal was fair is insufficient to satisfy the test .”
Fair dealing cannot be established simply by reliance on expert counsel . That is , although “ reasonable reliance on expert counsel is a pertinent factor in evaluating whether corporate directors have met a standard of fairness in their dealings with respect to corporate powers , its existence is not outcome determinative of entire fairness .” So , what is the point here ? Even if the deal was fair , the Court could still award damages because a better process might have resulted in a better deal .
An NCE ’ s redeployment options have now shifted in light of the Integrity Act . While some may view it as advantageous to redeploy EB-5 capital to subsequent ‘ new development ’