Fiduciary Duties Flashcards
What are the three basic fiduciary duties?
- Duty of Loyalty
- Duty of Care
- Good Faith
Duty of Loyalty
A Director has a fiduciary duty to support the corporation’s interest over his or her own conflicting interests, and any competing interests renders the business judgment rule inapplicable.
- Heightened scrutiny when personal interests are at issue
- Duty of Loyalty trumps BJR
What are the four Breaches of Loyalty that overcome the BJR?
BAD FAITH!
- Fraud
- Improper Motive
- Personal Interest
- Unusual and Exception circumstances (?)
Duty of Care
A director owes a duty to exercise good business judgment and to use ordinary care and prudence in the operation of the business. They must discharge their actions in good faith and in the best interest of the corporation, exercising the care an ordinary person would use under similar circumstances.
Duty of Care: BJR
Procedural; the Court won’t second guess a business judgment, even if it was stupid, unless it was so stupid that something else was going on
– Board must inform itself of all reasonably available material information (Van Gorkom)
Duty of Care: 102(b)(7)
Through the certificate of incorporation, the corporation can eliminate or limit personal liability for director breaches of the duty of care, but cannot eliminate liability for breaches of duty of loyalty or acts or omissions not made in good faith.
Good Faith: aka Bad Faith
Disney: Bad Faith
(1) Subjective bad faith: fiduciary conduct motivated by an actual intent to do harm; clearly bad faith
(2) lack of due care: gross negligence WITHOUT intent to cause harm; this is NOT bad faith
(3) Intentional Dereliction of Duty: conscious disregard of duties, an intent to violate positive law; this is bad faith
Francis:
– Duty to monitor; know what is going on within the business
Caremark: Only a sustained or systematic failure of the board to exercise oversight–such as an utter failure to attempt to assure a reasonable information and reporting system exists–will establish the lack of good faith necessary for liability
Good Faith: Standard for Violation
Only a breach in the duty of care OR loyalty may result in liability, BUT fialure to act in good faith may do so, BUT only indirectly.
- just because you fail to act in good faith doesn’t mean that you breached a duty of loyalty, but it is HIGHLY suggestive (only part of the analysis)
- (Stone v. Ritter)
Business Judgment Rule
Presumption that the board formed its judgment in good faith to promote the corporation’s best interests.
Business Judgment Rule: In Practice
If a director avoids any conflicts of interest (duty of loyalty issues) and acted on an informed basis (duty of care), courts will not permit plaintiffs to second guess that decision if it turns out bad.
Business Judgment Rule: Requirements
To take advantage of this presumption, the Board:
(1) must act on an informed basis,
(2) with good faith,
(3) with honest belief that action was taken with the corporation’s best interest
What is DGCL 141(a)?
Statutory recognition that the business and affairs of every corporation shall be managed by a board of directors, unless otherwise provided in the certificate of incorporation.
What is the purpose of DGCL 141(a)?
The statutory justification for the Business Judgment Rule.
