What are the responsibilities of corporate directors?
Directors assume the legal fiduciary "duty of loyalty," which prohibits the directors from serving their own interests at the expense of the corporation, and "duty of care," which requires competency, diligence and exercise of good faith in their decision-making and supervisory functions.
What is the Business Judgment Rule?
The "Business Judgment Rule" protects directors from being "second guessed" by shareholders and the courts on a particular business decision if the directors act on an informed basis, in good will, and in the honest belief that the decision was in the corporation's best interest. If the directors fulfill all requirements, the Business Judgment Rule protects them from personal liability.
How can directors fulfill their duty of care?
There are several ways for a director to fulfill the duty of care. If the director : (a) is not interested in this subject of business judgment; (b) is properly informed with respect to the subject of the business judgment to the extent the director reasonably believes to be appropriate under the circumstances; and (c) rationally believes that the business judgment is in the best interest of the corporation.
How can the Board of Directors ensure that it is sufficiently informed?
The Board of Directors can rely on advice of management and experts in making decisions provided that they exercise the necessary oversight and inquire into the information in which their advice is based upon. Even though directors may rely on outside experts, the director has the responsibility to evaluate carefully any information supplied. Directors do not necessarily need to verify information supplied by management.
Does California law govern a corporation's actions if it was incorporated outside the state of California?
Notwithstanding the state of incorporation, California imposes its director code of conduct on corporations chartered outside of California if more than 50% of the corporation's voting securities are held by persons with California addresses and underlying 50% or more of the average of the corporation's property, payroll and sales factors are derived from California.
How involved must the Board be in regard to the day-to-day running of the company?
Both California and Delaware have permitted Boards to delegate certain activities to Board committees and allowed directors to rely on certain specific reports. The Board is allowed to delegate day-to-day decisions but must maintain some supervisory control and review over its management. But, the delegations to committees, the delegation to management, and the reliance on reports does not relieve the director of common law duty of care.
When does the duty of loyalty become relevant?
The duty of loyalty arises in (a) transactions directly between the corporation and one of its directors or officers, (b) corporate opportunity situations, (c) corporate control contests, (d) transactions between corporation and interlocking Board of Directors, (e) executive compensation arrangements, (f) situations in which a director or officer competes with the corporation, and (g) defective disclosure to shareholders. The duty of loyalty arises even when the interested director may not have personally profited.
What must a director do to ensure that an interested director transaction is not void or voidable?
California law provides that if the transaction is approved by the shareholders in which the material facts concerning the director's interests is fully disclosed, the shareholders approve the transaction in good faith, and shares held by the interested directors are not entitled to vote, or is approved by disinterested directors. These safe harbor provisions do not protect a transaction that involves the lack of good faith, waste, or fraud.
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