What fiduciary duties do directors have?

Takeaway: Members of a board of directors owe legal duties to the stockholders of the company, including a duty of care (use reasonable care and diligence) and a duty of loyalty (act in the best interests of the company).

Founders of startups are typically the original directors of the company and need to understand their responsibilities in that role. Directors of a corporation have a fiduciary duty to act in the best interests of the corporation and its stockholders. Fiduciary duties are owed to all stockholders irrespective of the number of shares they own. This duty includes several obligations that must be met in order to ensure that the corporation is being managed in a way that maximizes stockholder value. Here's a detailed guide to the fiduciary duties of directors of a corporation.

Duty of Care

The duty of care requires directors to exercise reasonable care and diligence in their decision-making and oversight of the corporation. This duty requires directors to be informed about the corporation's business and to actively participate in its management. Directors must also ensure that they are making decisions that are in the best interests of the corporation and its stockholders.

Duty of Loyalty

The duty of loyalty requires directors to act in the best interests of the corporation and its stockholders, rather than their own personal interests. This duty prohibits directors from taking actions that would benefit themselves at the expense of the corporation or its stockholders. Directors must also avoid conflicts of interest and disclose any potential conflicts to the board.

Duty of Good Faith

The duty of good faith requires directors to act honestly and in good faith in their decision-making and oversight of the corporation. This duty prohibits directors from acting with an improper motive or for an improper purpose. Directors must also avoid making decisions that are reckless or that they know to be contrary to the best interests of the corporation and its stockholders.

Duty to Manage the Business Prudently

Directors have a duty to manage the business prudently and in a manner that maximizes stockholder value. This duty requires directors to monitor the corporation's financial performance and to make decisions that are in the best interests of the corporation and its stockholders. Directors must also ensure that the corporation is complying with all relevant laws and regulations.

Duty to Exercise Independent Judgment

Directors have a duty to exercise their own independent judgment in their decision-making and oversight of the corporation. This duty requires directors to evaluate all available information and to make decisions based on their own analysis and judgment, rather than simply relying on the opinions of others.

Business Judgment Rule

When evaluating whether a director has fulfilled their fiduciary duties, courts utilize the business judgment rule, which is a presumption that the director exercised their business judgment with due care and in good faith believing that they were acting in the best interests of the company. Absent a showing that the director breached their fiduciary duty or took action for no rational business purpose, courts will typically not infer a breach of fiduciary duty.

Conclusion

Directors of a corporation have several fiduciary duties that must be met in order to ensure that the corporation is being managed in a way that maximizes stockholder value. These duties include the duty of care, duty of loyalty, duty of good faith, duty to manage the business prudently, and duty to exercise independent judgment. It's important for directors to understand these duties and to take their responsibilities seriously in order to ensure the long-term success of the corporation.