Legal Blog

Corporate Directors, Fiduciary Duties, and the Business Judgment Rule

In the small business world, corporate directors are often also the owners of a corporation and thus, the two frequently become confused. However, specifically within the small business context, it is important to note that corporate directors are not like typical sole proprietors or even partners in many different ways. The corporate construct provides both protections and liabilities that a director of a corporation of any size should be aware of.

Fiduciary Duties

Every corporate director owes a fiduciary duty to the corporation he/she directs:

A director shall discharge his or her duties as a director, including his or her duties as a member of a committee: (a) in good faith; (b) with the care an ordinarily prudent person in a like position would exercise under similar circumstances; and (c) in a manner he or she reasonably believes to be in the best interests of the corporation.[1]

In other words, the statute requires that every corporate director make decisions carefully and in the best interest of the company regardless of the effect it has on the director’s interests. This can create a liability for a small business owner who operates a closely held corporation. Often, small business owners do not comply with all of the necessary formalities that go along with a corporation and sometimes use business assets and accounts inappropriately, albeit unintentionally. In other instances, a corporate director/owner of a corporation may make decisions that will inure a benefit to another related business interest of the director. The various situations that can arise for closely held corporation owners/directors in which they can possibly violate their fiduciary duty to the company are countless.

So, what’s the problem? It’s your business isn’t it? Such mishandling may not present a problem readily to a small business owner, however, if a dispute ever arises between the co-owners of the company, then breaches of fiduciary duty can be leverage used to force a buyout or other extreme remedy. This is why it is of the utmost importance for corporate directors to know their position and relationship to the company. A corporate director is a fiduciary of the company so he must always act in the company’s interest and not solely his own interest.

The Business Judgment Rule

With such a large potential liability for shareholders the law has created a shield of protection for corporate directors called the business judgment rule. At common law, the business judgment rule provides a presumption that a director made a (1) business decision, (2) with due care, (3) in good faith, (4) without a conflict of interest. A plaintiff must prove that one of the four elements is missing in order to overcome a presumption that the director acted in compliance with his fiduciary duties. Otherwise, the courts will generally defer to the decision of the director or board of directors and will not hold them liable for a poor business decision.

Florida statutes have codified the business judgment rule by defining specific instances in which a director should be held personally liable for his poor business decision. Essentially, unless one of these exceptions is met, a director is shielded by the business judgment rule. A director violates his fiduciary duties if his actions constitute:

  1. A violation of the criminal law, unless the director had reasonable cause to believe his or her conduct was lawful or had no reasonable cause to believe his or her conduct was unlawful;
  2. A transaction from which the director derived an improper personal benefit, either directly or indirectly;[2]
  3. An unlawful distribution under Florida Statutes 607.0834;
  4. In a proceeding by or in the right of the corporation to procure a judgment in its favor or by or in the right of a shareholder, conscious disregard for the best interest of the corporation, or willful misconduct; or
  5. In a proceeding by or in the right of someone other than the corporation or a shareholder, recklessness or an act or omission which was committed in bad faith or with malicious purpose or in a manner exhibiting wanton and willful disregard of human rights, safety, or property.[3]

 

The court will not hold a corporate director liable for even a poor business decision if he acts with the requisite good faith and due care. Only when he commits one of the above violations will he be held to have violated his duty to the corporation. Therefore, despite the many pitfalls that a director of a closely held, small business can run into, a corporate director, with the right advice, has a safety net in the form of the business judgment rule.

The reasons above are why it is important for any small business to have an attorney they can turn to when they have legal questions. The Boatman Law Firm’s Small Business Corporate Counsel Program offers small businesses the advantages of in-house counsel without the costs of high retainer and legal fees. For more information click here. For additional questions, call the Boatman Law Firm today at 239-330-1494.

THIS BLOG IS INTENDED FOR GENERAL INFORMATION PURPOSES ONLY. IT DOES NOT CONSTITUTE LEGAL ADVICE. THE READER SHOULD CONSULT WITH KNOWLEDGEABLE LEGAL COUNSEL TO DETERMINE HOW APPLICABLE LAWS APPLY TO SPECIFIC FACTS AND SITUATIONS. BLOG POSTS ARE BASED ON THE MOST CURRENT INFORMATION AT THE TIME THEY ARE WRITTEN. SINCE IT IS POSSIBLE THAT THE LAWS OR OTHER CIRCUMSTANCES MAY HAVE CHANGED SINCE PUBLICATION, PLEASE CALL US TO DISCUSS ANY ACTION YOU MAY BE CONSIDERING AS A RESULT OF READING THIS BLOG.

 

 

 

 

 

[1] Fla. Stat. § 607.0830

[2] These situations are further defined by the statute and such transactions can still be accomplished if handled appropriately by corporate directors. Transactions which impute a benefit to one or more corporate directors are not inherently illegal but are subject to attack if they are not handled appropriately.

[3] Fla. Stat. § 607.0831

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