Directors.27 duties United States corporate law

1 directors duties

1.1 stakeholder interests
1.2 conflicts of interest
1.3 duty of care
1.4 derivative suits

directors duties

while corporate constitutions typically set out balance of power between directors, shareholders, employees , other stakeholders, additional duties owed members of board corporation whole. first, rules can restrain or empower directors in favor exercise discretion. while older corporate law judgments suggested directors had promote shareholder value , modern state laws empower directors exercise own business judgment in way balance claims of shareholders, employees, , other stakeholders. second, state laws follow historical pattern of fiduciary duties require directors avoid conflicts of interest between own pursuit of profit, , interests of corporation. exact standard, however, may more or less strict. third, many states require kind of basic duty of care in performance of director s tasks, minimum standards of care apply in contract services. however, delaware has increasingly abandoned substantive objective duties, reinterpreted content of duty of care, allows liability waivers.

stakeholder interests


most states follow approach in shlensky v wrigley, directors not need maximize shareholder profits. can balance interests of stakeholders, in decision not put in floodlights play nighttime baseball games, in community s interest.

most corporate laws empower directors, part of management functions, determine strategies promote corporation s success in interests of stakeholders. directors periodically decide whether , how of corporation s revenue should shared among directors own pay, pay employees (e.g. whether increase or not next financial year), dividends or other returns shareholders, whether lower or raise prices consumers, whether retain , reinvest earnings in business, or whether make charitable , other donations. states have enacted constituency statutes , state expressly directors empowered balance interests of stakeholders in way conscience, or faith decisions dictate. discretion typically applies when making decision distribution of corporate resources among different groups, or in whether defend against takeover bid. example, in shlensky v wrigley president of chicago cubs baseball team sued stockholders allegedly failing pursue objective of shareholder profit maximization. president had decided corporation not install flood lights on baseball ground have allowed games take place @ night, because wished ensure baseball games accessible families, before children s bed time. illinois court held decision sound because though have made more money, director entitled regard interests of community more important. following similar logic in ap smith manufacturing co v barlow new jersey court held directors entitled make charitable donation princeton university on basis because there no suggestion made indiscriminately or pet charity of corporate directors in furtherance of personal rather corporate ends. long directors not said have conflicting interests, actions sustained.

dodge v ford motor co notoriously held in 1919 corporations had run profit of stockholders though states, , supreme court, have since followed view directors must balance stakeholders interests.

delaware s law has followed same general logic, though has no specific constituency or stakeholder statute. standard is, however, contested largely among business circles favor view directors should act in sole interests of shareholder value. judicial support aim typically found in case michigan in 1919, called dodge v ford motor company. here, ford motor company president henry ford had publicly announced wished not merely maximize shareholder returns raise employee wages, decrease price of cars consumers, because wished, put it, spread benefits of industrial system greatest possible number . group of shareholders sued, , michigan supreme court said in obiter dictum business corporation organized , carried on profit of stockholders. powers of directors employed end. however, in case damages claim against ford did not succeed, , since michigan law has been changed. supreme court has made clear in burwell v hobby lobby stores inc shareholder value not default or overriding aim of corporate law, unless corporation s rules expressly opt define such objective. in practice, many corporations operate benefit of shareholders, less because of duties, , more because shareholders typically exercise monopoly on control rights on electing board. assumes, however, directors not merely use office further own personal goals on interests of shareholders, employees, , other stakeholders.

conflicts of interest

since earliest corporations formed, courts have imposed minimum standards prevent directors using office pursue own interests on interests of corporation. directors can have no conflict of interest. in trusts law, core fiduciary duty formulated after collapse of south sea company in 1719 in united kingdom. keech v sandford held people in fiduciary positions had avoid possibility of conflict of interest, , rule should strictly pursued . later held no inquiry should made transactions fiduciary interested in both sides of deal. these principles of equity received law of united states, , in modern formulation cardozo j said in meinhard v salmon law required punctilio of honor sensitive... @ level higher trodden crowd.

the standards applicable directors, however, began depart traditional principles of equity required no possibility of conflict regarding corporate opportunities, , no inquiry actual terms of transactions if tainted self-dealing. in delaware decision 1939, guth v loft inc, held charles guth, president of drink manufacturer named loft inc., had breached duty avoid conflicts of interest purchasing pepsi company , syrup recipe in own name, rather offering loft inc. however, although duty breached, delaware supreme court held court @ particular circumstances, , not regard conflict existing if company lacked finances take opportunity, if not in same line of business, or did not have interest or reasonable expectancy . more recently, in broz v cellular information systems inc, held non-executive director of cis inc, man named mr broz, had not breached duty when bought telecommunications licenses michigan area own company, rfb cellular inc.. cis inc had been shedding licenses @ time, , broz alleged thought there no need inquire whether cis inc interested. cis inc taken over, , new owners pushed claim brought. delaware supreme court held because cis inc had not been financially capable @ time buy licenses, , there no actual conflict of interest. in order sure, or @ least avoid litigation, delaware general corporation law §144 provides directors cannot liable, , transaction cannot voidable if (1) approved disinterested directors after full disclosure (2) approved shareholders after disclosure, or (3) approved court fair.

miller v miller, 222 nw.2d 71 (1974)

corporate officers , directors may pursue business transactions benefit long can prove transaction, although self-interested, nevertheless intrinsically fair corporation.

lieberman v becker, 38 del ch 540, 155 2d 596 (super ct 1959)
dgcl §144 contains rule burden proving unfairness remains on plaintiff after disclosure
flieger v lawrence, 361 a2d 218 (del 1976) burden of proof shifts onto plaintiff show transaction conflicted if approval disinterested stockholders or directors has been given transaction. remillard brick co v remillard-dandini co, 109 cal app2d 405 (1952)
oberly v kirby, 592 a2d 445, 467 (del 1991)
cinerama inc v technicolor inc, 663 a2d 1156, 1170 (del. 1995)
benihana of tokyo inc v benihana inc., 906 a2d 114 (del. 2006)

duty of care


in ultramares corporation v touche, case concerning touche, niven & company (now deloitte) across nyse, cardozo cj held ordinary duty of care applicable professionals performing services requires people act care , caution proper calling .

the duty of care owed people performing services others is, in principle, applicable directors of corporations. speaking, duty of care requires objective standard of diligence , skill when people perform services, expected reasonable person in similar position (e.g. auditors must act care , caution proper calling , , builders must perform work in line industry standards ). in 1742 decision of english court of chancery, charitable corporation v sutton, directors of charitable corporation, gave out small loans needy, held liable failing keep procedures in place have prevented 3 officers defrauding corporation of vast sum of money. lord hardwicke, noting director s office of mixed nature , partly of nature of public office , partly agents employed in trust , held directors liable. though not judged hindsight, lord hardwicke said never determine frauds of kind out of reach of courts of law or equity, intolerable grievance follow such determination. many states have maintained objective baseline duty of care corporate directors, while acknowledging different levels of care can expected directors of small or large corporations, , directors executive or non-executive roles on board. however, in delaware, in number of other states, existence of duty of care has become increasingly uncertain.

in re citigroup inc shareholder derivative litigation ensured no director of major banking corporation held liable breach of duty of care, though risky practices caused global financial crisis of 2007-8.

in 1985, delaware supreme court passed 1 of debated judgments, smith v van gorkom. directors of transunion, including jerome w. van gorkom, sued shareholders failing adequately research corporation s value, before approving sale price of $55 per share marmon group. court held protected business judgment, directors of corporation [must have] acted on informed basis, in faith , in honest belief action taken in best interests of company. failing act on informed basis, if caused loss, amount gross negligence, , here directors liable. decision triggered panic among corporate boards believed exposed massive liability, , insurance firms feared rising costs of providing directors , officers liability insurance corporate boards. in response lobbying, delaware general corporation law amended insert new §102(b)(7). allowed corporations give directors immunity liability breach of duty of care in charter. however, corporations did not introduce liability waivers, courts subsequently proceeded reduce duty of care outright. in 1996, in re caremark international inc. derivative litigation required utter failure attempt assure reasonable information , reporting system exists , , in 2003 in re walt disney derivative litigation went further. chancellor chandler held directors liable showing reckless indifference or deliberate disregard of whole body of stockholders through actions without bounds of reason . in 1 of cases came out of global financial crisis, same line of reasoning deployed in in re citigroup inc shareholder derivative litigation. chancellor chandler, confirming previous opinions in re walt disney , dicta of re caremark, held directors of citigroup not liable failing have warning system in place guard against potential losses sub-prime mortgage debt. although there had been several indications of significant risks, , citigroup s practices along competitors argued have contributed crashing international economy, chancellor chandler held plaintiffs have prove bad faith conduct director defendants . suggested delaware law had negated substantive duty of care. suggested corporate directors exempt duties other professional performing services owe. itt remained unclear, change in chief justice of delaware supreme court in 2014, whether position remain.

derivative suits

because directors owe duties corporation , not, general rule, specific shareholders or stakeholders, right sue breaches of directors duty rests default corporation itself. corporation party suit. creates difficulty because always, right litigate falls under general powers of directors manage corporation day day (e.g. delaware general corporation law §141(a)). often, cases arise (such in broz v cellular information systems inc) action brought against director because corporation has been taken on , new, non-friendly board in place, or because board has been replaced after bankruptcy. otherwise, there possibility of conflict of interest because directors reluctant sue colleagues, particularly when develop personal ties. law has sought define further cases groups other directors can sue breaches of duty. first, many jurisdictions outside allow specific percentage of shareholders bring claim of right (e.g. 1 per cent). solution may still entail significant collective action problems shareholders dispersed, us. second, jurisdictions give standing sue non-shareholder groups, particularly creditors, collective action problems less. otherwise, third, main alternative individual shareholder may derive claim on corporation s behalf sue breach of duty, such derivative suit subject permission court.

increasingly courts have denied board should restrict derivative suits, in 2003 case in re oracle corp derivative litigation held insider trading claim against oracle corp ceo larry ellison proceed.

the risk of allowing individual shareholders bring derivative suits thought encourage costly, distracting litigation, or strike suits - or litigation (even if director guilty of breach of duty) seen counterproductive majority of shareholders or stakeholders have no conflicts of interest. accordingly, thought oversight court justified ensure derivative suits match corporation s interests whole because courts may more independent. however, 1970s states, , delaware, began require board have role. common law jurisdictions have abandoned role board in derivative claims, , in states before 1980s, board s role no more formality. then, formal role board reintroduced. in procedure bring derivative suit, first step shareholder had make demand on board bring claim. although might appear strange ask group of directors sued, or colleagues being sued, permission, delaware courts took view decision litigate ought default lie within legitimate scope of directors business judgment. example, in aronson v lewis shareholder of meyers parking system inc claimed board had improperly wasted corporate assets giving 75-year-old director, mr fink, large salary , bonus consultancy work though contract did not require performance of work. mr fink had selected of directors. nevertheless, moore j. held delaware supreme court there still requirement make demand on board before derivative suit brought. there presumption in making business decision, directors of corporation acted on informed basis in faith , in honest belief action taken in best interests of company , if owed jobs person being sued. requirement make demand on board will, however, excused if shown entirely futile , because majority of board alleged have breached duty. otherwise must shown board members in strong sense conflicted, merely working accused directors, , personal ties potentially creates, insufficient courts. indicated significant , controversial change in delaware s judicial policy, prevented claims against boards.

in 1981, in zapata corp v maldonado delaware supreme court held board of zapata corp., founded george h.w. bush, not sued breach of fiduciary duty. independent investigation committee competent reject demand derivative suit, despite being appointed board.

in cases corporate boards attempted establish independent litigation committees evaluate whether shareholder s demand bring suit justified. strategy used pre-empt criticism board conflicted. directors appoint members of independent committee , typically deliberate , come conclusion there no cause bringing litigation. in zapata corp v maldonado delaware supreme court held if committee acted in faith , showed reasonable grounds conclusion, , court satisfied [about] other reasons relating process , committee s decision not allow claim not overturned. applying connecticut law, second circuit federal court of appeals held in joy v north court substitute judgment decisions of supposedly independent committee, , board, on ground there scope conflicting interests. then, substantive merits bringing derivative claim assessed. winter j held overall shareholders have burden demonstrate action more not against interests of corporation . entail cost benefit analysis. on benefit side recoverable damages discounted probability of finding of liability , , costs side include attorney s fees , other out-of-pocket expenses , time spent corporate personnel , impact of distraction of key personnel , , potential lost profits may result publicity of trial. if thought costs exceed benefits, shareholders acquire right sue on corporation s behalf. substantive hearing on merits alleged breach of director s duty may heard. tendency in delaware, however, has remained allow board play role in restricting litigation, , therefore minimize chances held accountable basic breaches of duty.