Total Marks: 70 Maximum Time: 5 Hours

Instructions:
1) No clarifications shall be provided about the question paper during the course of the
exam.
2) All Questions carry equal marks.
3) Attempt any 5

1. In re The Walt Disney Co. Derivative Litigation, 825 A.2d 275 (Del. Ch. 2003), the
Delaware Chancery Court denied a motion to dismiss a derivative action against Disney
directors. The complaint alleged that the directors had breached their fiduciary duties
when they approved the employment agreement with Disney’s former president Michael
Ovitz and then again in their conduct when dealing with the subsequent non-fault
termination of this agreement allegedly engineered by chief executive officer, Michael
Eisner. The court noted the traditional reluctance to second-guess the business judgment
of an independent board, but that the facts alleged suggested more than merely negligent
or grossly negligent decision-making. They suggested a failure by the members of the
independent board to “exercise any business judgment” and to “make any good faith
attempt to fulfill their fiduciary duties.” The court found the alleged facts suggested that
the directors “consciously and intentionally disregarded their responsibilities, adopting a
‘we don’t care about the risks’ attitude concerning a material corporate decision.”

The employment agreement was negotiated between Eisner and Ovitz, close personal
friends for over 25 years. The board’s compensation committee never reviewed a
draft of the employment agreement and never received guidance from executive
compensation experts. The board approved the employment agreement without
reviewing the contract and failed to ask questions about the details of Ovitz’s salary,
stock options or possible termination. A similar scenario played out when Ovitz’s
agreement was terminated. Eisner negotiated the terms of Ovitz’s separation without
board input. Even after the board became aware of Eisner’s actions, including actions
that required board approval, the board failed to take action. The court found the
complaint sufficiently alleged a breach of the directors’ obligation to act honestly and
in good faith in the corporation’s best interests. This not only removed the directors’

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 conduct from the protection of the business judgment rule, but left them potentially
personally liable for their alleged inaction.

It is important to note that the Disney court did not dispute whether or not the
directors were independent, but instead focused on the directors’ failure to act in the
manner expected of independent directors. The directors relied too much on the
information given to them b management and failed to make their own inquiry into
the employment and severance arrangements. By taking such a laissez faire attitude
towards their duties, essentially allowing management to do as it pleased, the
directors’ conduct was not, according to the court, protected under the business
judgment rule. The court held that the directors could be personally liable for the
damages suffered by the corporation because the directors’ inaction amounted to a
failure to act in good faith. The message from Disney is that even if a board consists
of independent directors, those directors also must act independently. A “rubber
stamp” by independent directors is of no more value to corporate shareholders than
one by interested directors. In order to benefit from the protection of the business
judgment rule, independent directors must examine corporate decisions and be
willing to challenge management on the merits of corporate actions.

Discuss the role of independent directors and analyse whether independence of the
independent directors is in jeopardy. Suggest measures.
[14 Marks]

2. Auditors, before the Satyam Scam, were not placed with much liability. Same was the
case with UK courts, if one refers to the Caparo Industries Plc judgment. Much has
elapsed since then. Presently, we also have an authority which can proceed against them.
Discuss the contemporary role, responsibility and liability of auditors.
[14 Marks]

3. Various corporate governance committees have recommended that there should be board
committees like audit committee, nomination and remuneration committee and the like.

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 Discuss the importance and composition of the committees. Also discuss the
recommendations and provision revolving around nominee directors.

[14 Marks]

4. In the wake of the financial crisis, calls to separate the Chairman of the Board and CEO
roles in corporations have become common. Recently, the SEBI directive mandated
companies with 40% or more shareholding to separate the offices by April, 2019. In the
recent past, Jamie Dimon of JPMorgan Chase successfully fended off a challenge of his
dual role from public employee unions and the New York City Comptroller. The
shareholders of JPMorgan Chase voted overwhelmingly to retain the unified structure,
with analysts pointing to declining profits at companies such as the Walt Disney
Company in the years following separation of the roles as a motivating factor. Argue in
context with India.
[14 Marks]

5. Read the excerpt below taken from J. P. Singh’s Improving the Quality of Corporate
Governance in India (Indian Journal of Industrial Relations, Vol. 43, No.1 July 2007) and
answer the following:

Discuss the role of Board of Directors in ensuring good governance. Also discuss the
liability of the board members with the help of provisions and judgments.
[14 Marks]

BOARD: ‘THE DIRECTING MIND AND WILL’

The Board of the Company evolves a strategy and reports back to the shareholders on
performance. But that is not all. Between these two ends, lies the Board's most important task
to become the pivot, steering, supporting and supervising people to translate the strategy into

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 action. Company Boards have received close scrutiny and notice because of the general
perception that they neither display enough enterprise, nor do they provide proper support to
the people in implementing action-plans. The key imperative before the Board is to be
demonstrably effective in improving shareholder value, and being transparently accountable
to all those on whom the company has any impact. The different codes all over the world
and, now in India, have prescribed guidelines to help the Board to shoulder this
responsibility. However, these cannot be general remedies eventually the companies have to
evolve a structure and system specific to their needs.

The issue, in India particularly, is not only what the law requires, but also what the Board
should actually focus on. The law requires the Board to decide on borrowing, lending or
investment of funds, adoption of report and accounts and recommending dividends. While
these are important, are they the limits of involvement? Quite clearly, they are not. In
successful companies, the Boards discuss annual operating plans, capital budgets, monitor
results against preset targets, review competition and economic and political events, and
accordingly steer the business processes and infrastructure. Their focus should at all times be
on service to the customer and the consumer, thus creating shareholder value.

6. Since its first publication in 1992, the Cadbury Code has been copied, transposed or adapted
in every Member State of the European Union and in more than 60 other countries elsewhere
in the World – with the notable exception of the United States. The European Corporate
Governance Institute’s database of corporate governance codes, generally accepted as the
most comprehensive and up-to-date record, currently contains over 350 codes, code revisions
or code-like documents. At a peak in 2002, over 30 such documents were published in a
single year. The “comply or explain” concept has been hailed as a pragmatic tool that can
improve corporate governance without the need for inflexible, burdensome and misguided
rules, laws or regulation. An initiative that started as a response to some, with hindsight,
minor UK scandals has become a global phenomenon. Against his own wishes, the Cadbury
Committee’s chairman has acquired global corporate governance iconic status. What
explains the universal appeal of the Cadbury Code? Its substantive recommendations were an
unlikely candidate. They were conceived as a supplement to UK company law and listing

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 requirements in the institutional investor-dominated setting of the London market in the early
1990’s. The Code deliberately focused on the working of one-tier boards and on the role of
auditors in the United Kingdom. It came as a surprise that some of the Code’s suggestions
found an immediate following on the Continent, in particular the pronouncement that “the
majority of non-executives on a board should be independent of the company”. Do you agree
that voluntary regulations regime in corporate governance is more successful than imposing
laws? Argue in Indian context with the help of relevant reports, provisions and judgments.
[14 Marks]

7. Discuss the regulatory reforms in India in Corporate Governance along with the relevant
scams that have led to these reforms.
[14 Marks]

X --- X --- X

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