Fiduciary Duties in a Corporation: Duty of Care and How to Live Up To It

If you are a director or officer in a corporation, it is important to know the fiduciary duties you owe the corporation, as there may be some dire consequences if you fail to live up to them. These consequences can go as far as criminal liability. The two most important fiduciary duties owed to the corporation are the duty of loyalty and duty of care. While the duty of loyalty requires avoiding conflicts of interests and placing the best interests of the corporation first, the duty of care entails due diligence in fulfilling the requirements of your position. Often times understanding what the duty of care entails is a source of confusion for directors and officers. It is therefore important to understand how to live up to it in order to avoid liability.

The duty of care is about bringing due diligence to your officer or director position. Namely, it requires attention and intelligent reflection. This includes the fact that directors and officers must inform themselves, prior to making a business decision, of all material information that is reasonably available to them. According to the American Legal Institute, the duty of care requires the officer or director to not be interested in the subject, remains informed, and rationally believes business judgment is in the best interests of the corporation. In essence, the director or officer must make decisions under the business judgment rule. In order for the director or officer to avail himself of the protection of the business judgment rule, the director or officer must have made a decision, the director or officer must have informed himself with respect to the business judgment to the extent he reasonably believes appropriate under the circumstances, decision must have been made in good faith, and the director or officer must not have a personal financial interest in the subject matter.

There are some variations to the business judgment rule. For example, if an officer or director is hired for a higher level of expertise, they will be held to a higher standard. Alternatively, an inattentive director will only be liable if led to losses. Finally, a director or officer will not be able to maintain the protections of the business judgment rule when there has been fraud, illegality, conflict of interest, nonfeasance, lack of rational business purpose, or gross negligence. Mere errors of judgment are not sufficient grounds for interference by the courts.

Understanding what duty of care entails can often be a confusing subject for directors and officers. It is therefore of the utmost importance directors and officers understand the contours of the duty and live up to it. Consulting with an experienced legal team can help you best understand how the duty of care is applicable to you. Call the Trembly Law Firm at (305) 431-5678 to schedule a consultation today.