[Federal Register Volume 59, Number 42 (Thursday, March 3, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-4868]


[[Page Unknown]]

[Federal Register: March 3, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33670; File No. SR-MSTC-93-10]

 

Self-Regulatory Organizations; Midwest Securities Trust Company; 
Order Approving a Proposed Rule Change Relating to the Limitation or 
Elimination of Directors' Liability

February 23, 1994.
    On August 27, 1993, Midwest Securities Trust Company (``MSTC'') 
filed a proposed rule change (File No. SR-MSTC-93-10) with the 
Securities and Exchange Commission (``Commission'') under section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\ MSTC 
amended the filing on October 6 1993.\2\ The Commission published 
notice of this proposed rule change in the Federal Register on January 
5, 1994.\3\ No public comments were received. For the reasons discussed 
below, the Commission is approving the proposed rule change.
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\Letter from David T. Rusoff, Foley & Lardner, to Richard 
Strasser [Attorney], Division of Market Regulation, Commission 
(October 5, 1993).
    \3\Securities Exchange Act Release No. 33379 (December 23, 
1993), 59 FR 640.
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I. Description

    The proposal will limit or eliminate the potential monetary 
liability of MSTC directors to the fullest extent permissible under 
Illinois law.\4\ The proposed change is based on Section 2.10(b)(3) of 
the Illinois Business Corporation Act, under which MSTC is organized. 
That section allows corporations to adopt provisions in their articles 
of incorporation that limit or eliminate the potential monetary 
liability of directors under certain circumstances.
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    \4\Specifically, the proposal adds the following language to 
Article X of MSTC's Articles of Incorporation and to Article IV, 
Sec. 1 of MSTC's By-Laws:
    To the fullest extent that the Illinois Business Corporation 
Act, as it exists on the date hereof or as it may hereafter be 
amended, permits the limitation or elimination of the liability of 
Directors, no Director of the Corporation shall be liable to the 
Corporation or its shareholders for monetary damages for breach of 
fiduciary duty as a Director, except where such liability arises 
directly or indirectly as a result of a violation of the federal 
securities laws. No amendment to or repeal of this Article shall 
apply to or have any effect on the liability of any Director of the 
Corporation for or with respect to any acts or omissions of such 
Director occurring prior to such amendment or repeal.
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    General corporate law imposes a fiduciary duty of care upon each 
corporate director. This duty of care requires a director to exercise 
informed business judgment in good faith and to act with an honest 
belief that the action taken is in the best interest of the 
corporation. The proposal does not eliminate an MSTC director's duty of 
care but rather limits the personal liability of an MSTC director to 
MSTC or its shareholders should the director fail through negligence or 
gross negligence to satisfy his or her duty of care.\5\
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    \5\MSTC's proposal limits a director's liability even if that 
director had been grossly negligent provided that the director 
exercised informed business judgment in good faith and acted with an 
honest belief that the action taken was in the best interest of the 
corporation. Because there has been no judicial interpretation on 
the scope of the applicable Illinois legislation, it is possible 
that an Illinois court may find as a matter of law that a director 
cannot act in a manner that is both grossly negligent and in good 
faith.
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    The proposal does not limit a director's liability in instances 
where liability arises directly or indirectly as a result of a 
violation of federal securities laws. The proposal also does not 
eliminate equitable remedies such as rescission or injunctive actions. 
Moreover, it does not eliminate the liability of an officer of MSTC for 
actions taken in that capacity even if the officer is also a director. 
Finally, the proposal does not affect the liability of a director for 
acts or omissions that occurred prior to approval of the proposal.

II. Discussion

    The Commission believes the proposed rule change is consistent with 
the Act and in particular with Section 17A(b)(3)(C)\6\ of the Act in 
that it helps to ensure the fair representation of shareholders and 
participants in the administration of MSTC. By limiting or eliminating 
the potential monetary liability of MSTC directors for actions they 
take within the scope of their employment, the proposal should 
guarantee that qualified candidates are not discouraged from becoming 
MSTC directors. This should enable MSTC to maintain a variety of 
qualified candidates from which to choose directors and in particular 
should help MSTC retain directors who are fairly representative of 
MSTC's shareholders and participants.
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    \6\15 U.S.C. 78q-1(b)(3)(C) (1988).
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the Act and in particular with 
section 17A of the Act.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\7\ that the proposed rule change (File No. SR-MSTC-93-10) be, and 
hereby is, approved.
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    \7\15 U.S.C. 78s(b)(2) (1988).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\17 CRF 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-4868 Filed 3-2-94; 8:45 am]
BILLING CODE 8010-01-M