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Duties of the Board of Directors

One of the biggest problems faced by corporations is the known in economics as the “principal-agent problem.” Basically, the issue is that there are all sorts of costs imposed when one person has to act for the best interests of another. Agents may not know what the principal actually wants, or they may act in their own best interests, rather than those of the principal. Corporations are rife with situations that highlight this problem because management and the board of directors are supposed to be acting to the benefit of the company, which is really just a group of shareholders.

The law takes a variety of steps to ensure that people take the actions they should to benefit the company. With regard to the board of directors, some of the most important legal principles are the duties imposed on the directors. The law requires directors to take actions with the proper amount of care and to stay loyal to the company’s interests. Failure to do so can give rise to shareholder litigation.

Duties of Care and Loyalty

Florida law encodes the duties of the board of directors into statute at 607.0830(1). This statute requires directors to carry out their duties “With the care an ordinarily prudent person in a like position would exercise under similar circumstances.” Additionally, directors must discharge their duties in “a manner [they] reasonably believe to be in the best interests of the corporation.” The law also includes a requirement that the directors act in good faith. Courts in different jurisdictions are inconsistent in how they treat this requirement. Some courts subsume it into the duty of loyalty, while other courts treat it as a separate issue.

With regard to the duty of care, the general rule is that they must take due care to ensure that they make reasonably informed decisions and exercise some oversight of the company. They must make decisions based on information provided by experts and other knowledgeable people, but they cannot completely defer to those experts and sacrifice their own judgment.

The duty of loyalty is the more commonly litigated duty of directors. This duty requires directors to act in the best interest of the company rather than in their own interest. For instance, the duty of loyalty forbids self-dealing or other transactions where there is a conflict of interest.

The Business Judgment Rule

There is another legal rule that often arises in shareholder litigation surrounding the duties of directors, the business judgment rule. The business judgment rule is a presumption on the part of courts that directors are acting in the best interests of the company, and that courts should not be in the business of second-guessing the business decisions of directors. The idea behind the rule is that shareholders cannot take directors to court to hold them liable for honest mistakes that they make with regard to the running of the business. However, the protection of the business judgment rule is not absolute. For instance, a director who engaged in a self-interested transaction would likely not get the benefit of the rule.

The law imposes these duties on directors to ensure that they serve the best interests of shareholders. If you are a shareholder and think a decision by the board of directors may violate one of these duties, contact a Florida business litigation attorney at Pike & Lustig, LLP today.

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