How can a director defend against a claim that they breached their duty of loyalty?

If you're a director who has just been accused of breaching their duty of loyalty, you'll want to show that there was an independent ratification of your actions. What does that mean? Let's break it down:

Ratification means that there was some sort of official acceptance. "Independent ratification," in this context, just means that unbiased representatives of the corporation have officially agreed that your actions were not a breach of your duty of loyalty. In other words, if someone says, "Hey! You! You've just breached your duty of loyalty!" You, as a director, would defend against that by saying, "Nuh uh! The corporation was cool with it."

Obviously, though, now the problem is "How do you prove that the corporation was cool with it?" Because of course you would say that, since you are the one being accused. You need an independent, unbiased source to verify that the corporation is, in fact, cool with your actions. There are 4 ways to accomplish this and successfully obtain independent ratification:

The first way is to obtain a vote of support from the majority of the corporation's independent directors. An "independent director" is someone on the board who doesn't have a material relationship with the corporation. In other words, they aren't a salaried employee, or involved in the day to day operations. Thus, their opinion (and vote) is free from bias compared to a director whose livelihood is dependent on the corporation's success.

The second way is to obtain a vote of support from the majority of a committee that has at least 2 independent directors. This is more common in large corporations where the board is broken up into multiple smaller groups of directors that form committees. The logic here is that if it is too complicated to attempt the first way discussed above, then this second way is still valid to obtain independent ratification.

The third way is to get a vote of support by a majority of shares held by independent shareholders. In other words, you identify all the shareholders are aren't involved in the corporation's management, or an employee of the corporation, then have them vote based on the number of their shares (e.g., someone who has 10 shares gets 10 votes). If a majority of the votes come back to support your actions, then they have been independently ratified.

The fourth way is to look to the transaction itself and argue that it was fair to the corporation. What justifies "fairness"? That's for you to argue on the exam. Look for things like a fair amount being paid, or status of the corporation, etc. For example, if a director performs a transaction that appears to be a breach of their duty of loyalty due to it looking like the corporation was ripped off, you'll want to find arguments that show the corporation actually got a fair amount of value.