Duty of Care in a Corporation: Know What It Means

If you are on the board of directors in a business, you need to know what you owe to the corporation. The main two duties owed to the corporation from your position are the duty of care and the duty of loyalty. The duty of care means maximizing profit and behaving intelligently–in the business sense–within your position. The duty of loyalty insinuates placing the best interests of the corporation before your own. This article will briefly delve into the duty of care and explain what it entails.

Whether you are the director and owe the duty of care or have invested in a company that has a board of directors, understanding what the duty of care entails is important. In essence, the duty of care entails smart decision making. In order to prove that a director has violated his duty of care, a plaintiff must show that the challenged action was the result of bad faith, or that the decision was one which the director did not reasonable believe was in the corporation’s best interests. The duty of care is generally similar from jurisdiction to jurisdiction.

At a minimum, the director must meet the following duties: having a rudimentary understanding of the business; staying informed of the business; engaging in general monitoring; attending board meetings regularly; reviewing financial statements; and investigate doubtful matters. Directors generally receive a great deal of discretion in regards to their decisions under the duty of care. Actions brought against an officer or director pursuant to the duty of care are subject to the business judgment rule; the action must have been a result of gross negligence. The American Legal Institute has stated that an action lives up to the business judgment standard if the officer or director is not interested in the subject, is informed, and rationally believes that the decision was in the best interests of the corporation. The policy behind the lenient business judgment rule standard is hindsight bias: courts believe that it is impossible to judge in retrospect whether or not the decision was a good one at the time.

Fully understanding the standard of care owed to you by an officer or director can be a daunting task. As an investor, you must know of the duties owed to you and the corporation by your directors. As a director or officer, you need to be aware of the duties you owe the corporation. Consulting with an experienced business lawyer can help you understand your rights and duties to a corporation. Call the Trembly Law Firm at (305) 431-5678 today to schedule your consultation.