Duties of Directors and Officers Flashcards
Duty of care
Requires the fiduciary to act with the care that a person in like position would reasonably believe appropriate under similar circumstances (objective standard)
Reasonable reliance on others
Directors and officers must utilize a reasonable decisionmaking process when taking actions; they can reasonably rely on the following individuals and information in performing their functions:
- An individual the director or officer has delegated to perform one or more of the director’s or officer’s functions
- Information, reports, and/or statements prepared by a professional employed by the corporation
- An employee the director or officer believes to be reliable and competent
- Legal counsel, an accountant, or other individual who advises the corporation
Business judgment rule
A rebuttable presumption that immunizes directors and officers
from liability if their decision was made by a majority in good faith and with due care (e.g., reasonably in the corporation’s best interests, a fully informed decision without any conflicts of interest)
When can the business judgment rule be rebutted?
The presumption can be rebutted if the decision:
- Was made in bad faith
- Was one the fiduciary did not reasonably believe to be in the corporation’s best interests
- Was one the fiduciary made although the fiduciary knew or should have known he was not informed to an extent appropriate in the circumstances
- Was the result of a lack of objectivity due to the fiduciary’s familial or business relationship with another person having a material interest in the challenged conduct
- Was the result of a lack of independence due to the fiduciary’s domination or control by another person having a material interest in the challenged conduct
- Was the result of the fiduciary’s sustained failure to devote attention to ongoing oversight of the corporation’s business and affairs
- Resulted in the fiduciary’s receipt of an unentitled financial benefit
Duty of loyalty
Requires the fiduciary to subordinate the fiduciary’s own interests to those of the corporation and to act in a manner that the fiduciary reasonably believes to be in the corporation’s best
interests
Impermissible self-dealing
The fiduciary cannot engage in self-dealing transactions (i.e., transactions between a director or officer and the corporation) that result in the fiduciary unfairly profiting at the corporation’s expense
Usurping a corporate opportunity
The fiduciary cannot pursue a profitable business idea that belonged to the corporation, for personal gain, without first offering it to the corporation
Competing with the corporation
The fiduciary cannot compete with the corporation. Competition varies depending on the jurisdiction’s law
Failing to disclose material facts
The fiduciary’s failure to disclose to the board of directors material information concerning a transaction that affects the corporation can constitute a violation of the duty of loyalty (e.g., a conflict of interest exists, a relative is a party to the transaction, or the fiduciary serves in some capacity in a company the corporation is doing business with)
Safe harbor
A fiduciary might be able to avoid liability by getting the board of directors or the shareholders to approve a transaction in good faith after disclosing the fiduciary’s interest
in it, or by showing that the transaction was fair to the corporation
Exculpatory clauses
May shield fiduciaries from personal liability for breach of a duty, but these clauses generally do not apply to a breach of the duty of loyalty, a bad-faith act or omission, intentional misconduct, or any transaction that produced an improper personal benefit
Duty of good faith
Prohibits the fiduciary from engaging in conduct that violates the spirit of either the duty of care or loyalty, even if that conduct technically is allowed by law; directors and officers must act with a conscious regard for their responsibilities as fiduciaries when making all decisions for the corporation. A violation of the duty of good faith may include intentionally disregarding one’s duties, intentionally acting for a purpose other than the corporation’s benefit, or intentionally violating the law
Remedies for breach of fiduciary duty
A successful lawsuit against a director or officer for breach of fiduciary duty can result in the director or officer being personally liable for an award of damages or equitable relief
Indemnification
A fiduciary who is successful in defending a suit is entitled to indemnification for reasonable expenses incurred in the defense. A corporation may indemnify an unsuccessful defendant if the fiduciary acted in good faith and reasonably believed she acted in the corporation’s best interests
