Directors: duties and liabilities Flashcards
Duty of care
A director must act with the care that a person in a like position would reasonably believe appropriate under similar circumstances.
If the director has special skills—e.g, as an accountant or lawyer—she is expected to use those special skills.
Duty of care: reliance defense
A director or officer is entitled to rely on the expertise of officers or other employees, outside experts, and committees of the board.
Duty of loyalty: self-dealing
A director violates her duty of loyalty if she engages in a transaction with the corporation that benefits her or her close family member.
A conflict-of-interest transaction, or “self-dealing,” is any transaction between a director and his corporation:
- that would normally require approval of the board of directors and
- that is of such financial significance to the director that it would reasonably be expected to influence the director’s vote on the transaction.
The remedy is an injunction or rescission, and the corporation can seek damages from the interested director.
Duty of loyalty: usurping a corporate opportunity
A director cannot take an opportunity that the corporation would be interested in without first offering it to the corporation.
But if the corporation declines the opportunity, the director may take it without violating the duty of loyalty.
Duty of loyalty: self-dealing safe harbor
But the director has a safe harbor from a loyalty claim if:
(1) The interested director disclosed all material facts to the board and receives approval by a majority of the disinterested board of directors;
(2) The interested director discloses all material facts to shareholders and receives approval by a majority of disinterested shareholders; or
(3) The transaction is fair to the corporation—both substantively and procedurally.
Duty of loyalty: entire fairness
The fairness test looks at the substance and procedure of the transaction:
- Substantively, the test asks whether the corporation received something of comparable value in exchange for what it gave to the director;
- Procedurally, it looks at whether the process followed by the directors in reaching their decision was appropriate.
Business judgment rule
There is a rebuttable presumption that a director reasonably believed her actions were in the best interests of the corporation.
The rule protects a director from care claims if she acted in good faith.
Business judgment rule: overcoming the presumption
To overcome the business judgment rule, a plaintiff must show that the director:
(1) Did not act in good faith;
(2) Was not informed to the extent reasonably necessary;
(3) Did not show objectivity and had a material interest in the decision;
(4) Failed to timely investigate after being alerted to a significant matter; or
(5) Failed to act in any other way as a reasonable director.
Required indemnification
A corporation is required to indemnify a director:
- for any reasonable expense, including court costs and attorney’s fees, incurred in the successful defense of a proceeding against the director in his role as a director;
- when ordered to do so by the court.
Prohibited indemnification
A corporation is prohibited from indemnifying a director against liability because of the receipt of an improper personal benefit.
Permissive indemnification
A corporation may indemnify a director in the unsuccessful defense of a suit when:
(1) The director acted in good faith with the reasonable belief that:
(a) his conduct was in the best interests of the corporation, or
(b) that his conduct was at least not opposed to the best interests of the corporation; and
(2) In the case of a criminal proceeding, the director did not have reasonable cause to believe that his conduct was unlawful.
