Officers and directors of a corporation, no matter the size, owe fiduciary duties to shareholders and to the business entity itself. Corporate officers and directors are said to be “fiduciaries” because they hold a legal or ethical relationship of trust.  In subsequent blogs, we will go into further detail on the subjects we touch on here, but this entry is designed to give a basic, introductory survey of these duties. Essentially, fiduciary duties in a corporate setting require officers and directors to apply diligence and care, act in the best interests of the shareholders and corporation, and act in good faith.

Duty of Care

Officers and directors must use care and be diligent when making decisions on behalf of the corporation and its shareholders, who are the true owners of the corporation.  Generally, officers and directors will satisfy this duty if they act:

  • In good faith
  • With the care of a reasonable person in a similar position
  • With reasonable belief that their decisions are in the best interests of the corporation

A lack of due care is exhibited, for example, when an officer or director fails to undertake an adequate degree of due diligence, to regularly attend board meetings, or to supervise staff – resulting in damages to the corporation.

Duty of Loyalty

Officers and directors have an undivided duty of loyalty to the corporation and its shareholders. In other words,  when acting as an officer or director, they must make the interests of shareholders and the corporation paramount.

This duty of loyalty can be breached by the misappropriation of a business opportunity,  authorizing an “interested” transaction in which the officer or director has a personal stake in the outcome, or if he or she fails to keep corporate information confidential.

If the duty of loyalty is found to be violated, courts may order the offending fiduciary to pay restitution and may impose punitive damages to deter future violations.

To prevent a violation of the duty of loyalty, disclosure is critical. If a fiduciary wishes to make a self-interested transaction or take a corporate opportunity, he or she must first fully disclose both the facts of the conflict and the details of the transaction.  Generally, the transaction must then be approved by either a majority of disinterested directors or a majority of disinterested shareholders.

Duty of Good Faith

While under Delaware law, it remains unclear whether this is technically a stand-alone fiduciary duty or part of the duty of loyalty, the duty of good faith is generally understood to mean a “conscious disregard” or “intentional dereliction” of duty. Officers and directors of a corporation must act with a conscious regard for their responsibilities as fiduciaries.

A breach of the duty of good faith may include an intentional disregard of the usual duties of an officer or director, intentionally acting for a purpose other than the benefit of the corporation, or intentionally violating the law.

The “Business Judgment Rule”

Although officers and directors must be careful not to violate their fiduciary duties, they can take reasonable risks, direct corporate business and affairs, and make innocent mistakes without judicial scrutiny and the  courts’ second-guessing. This so-called “business judgment rule” protects officers and directors from liability provided they:

  • Made decisions on an informed basis and in good faith
  • Honestly believed their actions were in the corporation’s and shareholders’ best interests

Whether you are currently an officer or director, intend to hold such a position, or believe one of your fellow officers or directors may have betrayed your trust, contact us for advice on how to proceed. Such breaches cannot only have disastrous consequences for the liable party, but also for the corporation itself.