In a previous post, we began discussing how the business entity of choice for many entrepreneurs is the corporation owing to its provision of limited liability to directors and officers. In other words, these parties cannot be held personally liable for the debts and obligations of the corporation, such that their personal assets are protected.
We also touched on the point that this provision of limited liability to directors and officers, while highly desirable, did not equate to a complete absence of fiduciary duties.
The duty of care
The majority of the states, including Florida, have adopted what is known as the Model Business Corporation Act. This is significant, as the MBCA provides that both directors and officers are subject to the duty of care.
In general, this means that directors and officers must execute their respective duties in good faith, meaning in the same manner as a reasonably prudent person similarly situated and in furtherance of the best interests of the corporation.
It’s important to understand, however, that directors and officers cannot be held legally accountable by shareholders for demonstrating what amounts to a less than stellar business acumen.
Indeed, under the business judgment rule, courts will typically give the business judgment of directors and officers the benefit of the doubt, holding that the duty of care has been satisfied wherever the directors or officers whose conduct is being questioned demonstrated judgment that was rational, reasonably informed, made in good faith and absent any conflicts of interest.
In the event a plaintiff is able to meet this burden of proof, directors and officers can still show that they satisfied the duty of care by demonstrating that the decision in question was reached via a fair process and produced a fair outcome for shareholders, or, in legal terms, entire fairness.
In our next post on this topic, we’ll explore the duty of loyalty.
Consider speaking with an experienced legal professional as soon as possible if you have any questions or concerns relating to a business law matter.