The Duties Of A Director

A member of the board of directors (a director) of a corporation on a normal day typically has two duties that she must comply with.

The Duty Of Care

The duty of care means that a director must inform herself with all material information reasonably available to her before making a business decision. Having done that she must act with "that degree of care which an ordinarily prudent person would use in similar circumstances".

Directors are entitled to rely on the records of the corporation as well as any information prepared by corporate counsel, accountants or other experts. But no matter how expertly prepared the data is that directors are using, directors must also be engaged, informed, attentive to detail and use a critical eye to evaluate that data.

The Duty Of Loyalty

Directors have a duty of loyalty to the corporation, which means that directors must act in good faith and in the interests of the corporation and its shareholders. In many cases directors must be "disinterested" which means that they "neither appear on both sides of a transaction nor expect to derive any personal benefit from it".

Directors typically must also be independent, meaning that their decisions must be "based on the corporate merits of the subject before the board rather than extraneous considerations or influences".

The Business Judgment Rule

So long as directors fulfill their duties of care and of loyalty with respect to the corporation, directors are protected from personal liability for the actions that they take as directors of the corporation. This means that courts will, if directors are fulfilling their duties, defer to the business judgment of the directors as to the best course of action for the corporation to take.

It goes without saying that this piece is not legal advice, and for that you should consult an experienced attorney. For more information on the duties of a director along with many other matters of interest see The Director's Handbook.


 

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