A Less Controversial, but Just as Important, Fiduciary Duty

The duty of loyalty stands for the proposition that a director must put the interests of the corporation and its shareholders ahead of his own. This requires a director to disclose conflicts of interest in which he has some personal stake in the outcome of a decision made by the board of directors. An "interested" director should essentially remove himself from the conflicted decision to be made and leave the decision-making authority to the "disinterested" directors.

It is vitally important that a director take her duties seriously, because a director that acts pursuant to the duty of care is entitled to significant deference in the form of the business judgment rule.

The business judgment rule is a standard of review imposed by the courts that presumes directors have fulfilled their fiduciary duty, and a plaintiff must first rebut that presumption in order to prove a breach worthy of remuneration. This is no easy task – courts do not like to play Monday-morning quarterback and substitute their own version of corporate decision-making with the benefit of hindsight. But if the plaintiff successfully rebuts the presumption and proves that a director did not make an informed decision in good faith and in the best interests of the corporation and its shareholders, the burden of proof shifts to the director to prove the decision was "entirely fair" to the corporation and its shareholders.

To protect against plaintiffs challenging the business judgment of a director, corporations are generally permitted to indemnify their directors and/or purchase directors and officers (D&O) insurance. But to avoid a breach of fiduciary duty in the first place, what should a director do? 

• Actively participate in the board's decision-making process. Ask questions, take time to digest materials presented, and render decisions only after substantive consideration.

• Disclose conflicts of interest that would impugn the duty of loyalty. Err on the side of caution and abstain from decisions in which there is a conflict.
• Rely on corporate officers or consultants only after reasonable inquiry and with appropriate supervision.
• Keep minutes of meetings that reflect engagement and deliberation regarding the matters for discussion, and any resolutions or actions taken as a result.
• Adhere to standardized governance practices and processes; establish committees as necessary and document committee activities.

There have been reams of legal treatises written about this topic, and case law is particularly abundant in Delaware (which most corporations call home and thus the jurisdictional nexus of this article). As such, I didn't even begin to delve into the level of detail found in such treatises for the sake of brevity and reader sanity.

It should also be noted that a director's actions are under particular scrutiny and subject to additional duties in the context of a merger or acquisition, so be particularly sensitive in times of corporate transition.

The fiduciary duties imposed on a corporate board may not be at the center of our industry's current fiduciary kerfuffle, but it remains an important concept nonetheless.