March 04, 2022

The Corporate Guide: You’re a Corporate Director. What’s Next?

What duties apply to directors?

In managing and controlling a company’s business and affairs, directors and officers of a Delaware corporation owe the simultaneous fiduciary obligations of acting with due care and loyalty to the corporation and its stockholders. Over time, and largely through case law, those obligations have given birth to the duty to disclose material information and conflicts, as well as for board-level oversight of the company and its functions.

Duty of Care

  • Directors must act on an informed basis and consider all material information that is reasonably available.
  • Satisfying the duty of care requires having reasonable knowledge of their company’s business, obtaining credible information with respect to corporate actions, and anticipating and understanding the consequences of each decision or transaction.
  • Directors may rely on competent information provided by others, such as officers, employees, counsel, committees, or other persons, if the directors have no reason to believe that the information is unreliable or incompetent.
  • A director cannot delegate the director’s final board authority to others.

Duty of Loyalty

  • To satisfy the duty of loyalty, a director must act:
    • In good faith.
    • With an honest belief that a specific transaction, strategy or course of action is in the best interests of the company and its stockholders.
    • In a disinterested and independent basis.
  • It is worth noting that a director can have interest and lack independence without being disloyal. That said, Delaware courts scrutinize transactions involving questions of interest and independence. Deference, however, is given to decisions made by a majority of disinterested and independent directors.

Duty to Disclose

  • In circumstances where a director has interest or lacks independence, the director must disclose promptly to the board the details that might raise doubt about the director’s disinterestedness and independence.
  • A corporation’s board of directors also must disclose fully and fairly all material facts within the board’s control. A fact is material if:
    • It would have been viewed by a reasonable investor as having significantly altered the total mix of information available.
    • There is substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.

Duty of Oversight

  • The duty of oversight requires directors to:
    • Institute a system of board-level reporting and controls designed to flag for the board any potential problems with the company’s operational viability, legal compliance and financial performance.
    • Ensure that the system operates as intended, by making directors aware of matters requiring their attention.
    • Act with good faith to address red flags.
    • Not act in bad faith by consciously ignoring red flags or issues regarding compliance with laws, regulations or corporate protocol.
  • Although the responsibility cannot be delegated, aspects of the duty of oversight can be accomplished by developing board committees (for example, compliance or finance), or tasking certain officers with reporting obligations.

Environmental, Social and Governance (ESG): Directors of a Delaware corporation are not prohibited from considering the interests of other stakeholders (like the environment, general society, employees or the communities in which the company conducts business) in making decisions and exercising their oversight roles. That said, it must be reasonably conceivable that the transaction or corporate strategy pursued is in the corporation’s best interest over the time horizon being determined by the board to be appropriate for achieving the corporation’s goals.

What should a director keep in mind?

Generally, a director seeking to satisfy fiduciary duties should keep the following issues in mind:

  1. What information do I need to see and consider to make independent, disinterested, informed and good-faith decisions?
  2. Are there any conflicts or competence concerns, including as they relate to advisors and other agents?
  3. What is a reasonable and appropriate process for analyzing and making decisions about the transaction or issues being considered?

What standards apply to directors’ conduct?

If a company’s board considers and acts in accordance with the duties (and questions) detailed above, courts reviewing the board’s conduct will apply the business-judgment rule.

  • A core feature of the business-judgment rule is the rebuttable presumption that directors acted after informing themselves, in good faith and in the honest belief that the action taken was in the corporation’s best interest.
  • Directors are protected from liability for acting with a rational business purpose.
  • To rebut the presumptions afforded by the business-judgment rule, a plaintiff must provide evidence that the directors were grossly negligent, acted in bad faith, or were motivated by interests other than those of the company and its stockholders.

Are there any protections afforded to directors if they are sued?

Given the interest in attracting talented, experienced and diligent individuals to serve as directors of Delaware companies, Delaware law seeks to reduce the burden on corporate directors to satisfy their fiduciary duties, while limiting the consequences of a breach by disinterested, well-informed directors acting in good faith.

  • Reliance on the company and its agents: A director is permitted to rely, in good faith, on the records of the corporation. A director also may rely, in good faith, on information and materials presented to the board by the company’s officers, employees, board committees or by vendors who were selected with reasonable care and have sufficient professional competence.
  • Possible exemption for monetary liability for certain breaches: Through its certificate of incorporation, Delaware corporations can eliminate a director’s personal liability for monetary damages associated with a breach of the duty of care. This exculpation provision does not apply to breaches of the duty of loyalty or the duty of oversight. You should determine whether your company’s incorporation materials include an exculpation provision.
  • Indemnification and expense advancement: Section 145 of the Delaware General Corporation Law permits corporations to protect present and former directors and officers from expenses incurred in connection with threatened, pending, or completed litigation arising from actions taken in service to the company or at the company’s direction. You should determine what indemnification and advancement rights you have as a director by checking the certificate of incorporation, bylaws and other agreements.

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