Directors: Fiduciary Duties

Question 1

Duty of care

Answer 1

Directors and officers owe the corporation a fiduciary duty of care. This duty includes:
1. the duty to take reasonable steps to monitor the corporation’s management.
2. the duty to be satisfied that proposals are in the corporation’s **best interests **
3. the duty to **disclose material information **to the board; AND
4. the duty to make reasonably informed decisions*

*in making such decisions, directors and officers may rely on information from others whom they reasonably believe are reliable.

Question 2

Business judgment rule

Answer 2

In suits alleging that a director or officer violated his duty of care, courts will apply the business judgment rule. Under this rule, a court will not second guess the decisions of a director/officer so long as the decisions are made:
1. in **good faith **
2. with the care an ordinarily prudent person in a like position would exercise under similar circumstances; AND
3. In a manner the director/officer reasonably believes to be in the best interest of the corporation

Question 3

Conflicting interest transactions

Duty of loyalty

Answer 3

Directors and officers have a duty to avoid implicating their personal conflicting interests in making business decisions for the corporation.

A director/officer has a conflicting inerest when the director/officer or a family member either:
1. is a party to the transaction; or
2. has a **beneficial interest in the transaction **of such significance to the director/officer that the interest would reasonably be expected to exert an influence on the director’s/officer’s judgment if called upon to vote on the transaction.

Question 4

Safe harbors

Duty of loyalty

Answer 4

A director/officer that enters into a conflicting interest transaction may be protected from liability if:
1. disinterested shareholders approve the conflicting transaction;
2. the non-interested members of the board authorize the conflicitng interest transaction; or
3. the transaction, judged according to the circumstances at the time of the commitment, is established as to have been fair to the corporation.