Fiduciary Duties

Question 2

What duties are owed by directors and officers to the corporation?

Answer 2

duty of care and
duty of loyalty.

Question 3

What duty of care is owed to a corporation (and its shareholders) by directors and officers?

Answer 3

Duty of care 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.

Question 4

In terms of duty to make reasonably informed decision, on whom may BOD/officers rely?

Answer 4

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

Question 5

What is the business judgment rule?

Answer 5

In suits alleging that a director or officer violated his duty of care owed to the corporation, 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 interests of the corporation.

Question 6

Liability. If a director or officer breaches the duty of care…

Answer 6

…he may be held personally liable for damages.

Question 7

May a corp’s AOI limit BOD/officer liability?

Answer 7

A corporation’s articles of incorporation may reasonably limit the liability of directors and officers for bad judgment, but NOT for bad faith misconduct.

for bad judgment = YES
for bad faith = NO

Question 8

What is the duty of loyalty owed by BOD/officers to corp/SH’s when there is a conflicting interest transaction?

Answer 8

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

Question 9

A director/officer has a conflicting interest in a transaction when…

Answer 9

…the director/officer or a family member either:
1. Is a party to the transaction; OR
2. Has a beneficial financial 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/officer’s judgment if called upon to vote on the transaction.

Question 10

What safe harbors are available to director/officers who enter into a conflicting interest transaction?

Answer 10

A director/officer that enters into a conflicting interest transaction may be protected from liability if:

1. Disinterested shareholders approve the conflicting interest transaction;
2. The non-interested members of the board authorize the conflicting interest transaction; OR
3. The transaction, judged according to the circumstances at the time of commitment, is established to have been fair to the corporation.

Question 11

What is the corporate opportunity doctrine?

Answer 11

The corporate opportunity doctrine prohibits directors and officers from usurping business opportunities that rightfully belong to the corporation for their own benefit.

Question 12

Directors breach their fiduciary duties—and the business judgment rule provides no protection—
when they…

Answer 12

…approve illegal business operations (or refuse to investigate alleged illegal business
activities), even though the illegal business may be profitable to the corporation.