"Fiduciary Duties" Owed to Corporations by its Board Members |
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WHAT IS A
"FIDUCIARY DUTY" ?
- Each board members owes a legal duty of good faith, full disclosure, fair dealing, and undivided loyalty to the corporation.
- In other words, directors must positively renounce anything that is unfair.
- The fiduciary duty imposes a duty that is higher than
the
morals of the work-a-day world, the marketplace, and the trodden crowd.
PURPOSE OF
FIDUCIARY DUTY:
- The purpose of the fiduciary duty is to remove all temptation since it recognizes the weakness and frailty of human nature.
- A breach typically occurs where directors or officers
self
deal to their own benefit and to the detriment of the corporation.
TYPES OF
FIDUCIARY DUTIES:
- conflict of interest:this potentially can occur whenever the corporation is considering entering into a contract with one of its board members (e.g. a lease, an employment contract, sale of stock, etc.). The affected board member in such a situation has a potential for divided loyalties. To avoid problems, the minutes should show that the board member disclosed the potential conflict, that there was a full discussion about how the proposed deal was in the best interests of the corporation, and that the board member with the conflict abstained from the vote. The bottom line, however, is that the proposed transaction must actually be in the best interest of the corporation.
- Duty of
Loyalty: A director has a duty to act for the benefit of
the corporation. A director's fiduciary duty is one of undivided
loyalty to the company on whose board he or she sits. That duty
encompasses all of the elements of loyalty, care and fair dealing
implicit in a fiduciary relationship.
- The Duty to Act in Good Faith: Directors must act in the best interests of the corporation and its members or stockholders. More specifically, the Duty to Act in Good Faith prohibits members of the board of directors from: (1) failing to act in the face of a known duty to act; (2) acting in a manner unrelated to a pursuit of the corporation’s best interest; and (3) maintaining a sustained or systematic failure to provide oversight.
- Competing
with the corporation: Violates that fundamentals
of duty of undivided loyalty.
- Usurpation of corporate opportunity: directors cannot divert for themselves business opportunities that rightfully belong to the corporation.