Entrepreneurs are used to juggling many roles on their way to building a great company –you’re a founder, employee, director and officer. When you’re wearing the director “hat” for a private Delaware corporation, make sure to be mindful of your fiduciary duties to limit potential personal liability. This is a complex area of the law, but here are some of the basics.
Directors have fiduciary duties of loyalty and care to the company and its stockholders
- Duty of loyalty. You must put the interests of the company and its stockholders over your own personal interests in making decisions for the Company and evaluating opportunities. This includes not taking opportunities that arise for yourself before offering them to the company, and not divulging or using company confidential information for personal gain.
- Duty of care. You must exercise care in making decisions as a director, based on adequate information and a good faith belief that your decisions are in the best interest of the company and its stockholders
These duties also extend to creditors if a company is insolvent or in the “zone of insolvency” – this shift of duties is outside the scope of this article.
Exercising fiduciary duties protects you and your fellow directors
If you fulfill these fiduciary duties in a transaction in which you don’t have a material personal interest, a Delaware court will generally defer to your business judgment, presuming that the board decision was made on an informed basis, in good faith and in the honest belief that it was in the company’s best interests.
A plaintiff could rebut that presumption, but a court generally will not second guess a director’s business judgment and find you personally liable for what turns out to be a poor business decision with the benefit of hindsight.
Steps you can take to fulfill your fiduciary duties
- Do your diligence – diligence is key when evaluating significant deals, contracts, new hires, investors and business partners (see below about engaging experts)
- Hold regular board meetings – the company should have regularly scheduled board meetings (and special meetings as needed) at which management and advisors provide information regarding the company’s business, and other relevant inputs for decisions facing the board. This is particularly important if you have any non-employee directors on the board, who are not as close to the company’s operations
- Respect the process – conduct a thorough and thoughtful board decision-making process for significant transactions
- Draft clear minutes – while board meeting minutes often don’t include the nitty gritty of all board discussions, a description that demonstrates the extent of the information presented to the board and the breadth of the board’s analysis and discussion is essential for the record
- Disclose conflicts – if you have a conflict of interest in a potential key transaction with the company, you must disclose it to the board. The board, with counsel, would then determine how to proceed – you may recuse yourself from the vote or the board could set up a disinterested committee to review and approve the transaction
- Engage experts – retain outside counsel and other advisors to advise the company on financing transactions, acquisitions, strategic alternatives and corporate governance
Part of the Board of directors 101 collection
FAQs
Directors have fiduciary duties of loyalty and care to the company and its stockholders. Duty of loyalty. You must put the interests of the company and its stockholders over your own personal interests in making decisions for the Company and evaluating opportunities.
What are the 7 duties of a director? ›
Quick links
- Act within powers.
- Promote the success of the company.
- Exercise independent judgment.
- Exercise reasonable care, skill and diligence.
- Avoid conflicts of interest (a conflict situation)
- Not accept benefits from third parties.
- Declare interests in proposed or existing transactions or arrangements with the company.
Directors' Duties
- Act within their powers. ...
- Promote the success of the company. ...
- Exercise independent judgement. ...
- Exercise reasonable care, skill and diligence. ...
- Avoid conflicts of interest. ...
- Not accept benefits from third parties. ...
- Declare interests in transactions or arrangements.
Directors are personally responsible for maintaining proper company records and must ensure that the company keeps up-to-date financial records that: Explain the company's financial position and performance; and correctly record and explain its transactions.
What are the 5 fiduciary duties? ›
Key Takeaways
- A fiduciary duty involves actions taken in the best interests of another person or entity.
- Fiduciary duty describes the relationship between an attorney and a client or a guardian and a ward.
- Fiduciary duties include duty of care, loyalty, good faith, confidentiality, prudence, and disclosure.
General Management Responsibility of the Directors
A director's main responsibilities include the following: (1) to protect shareholder investments, (2) to select and remove officers, (3) to delegate operating authority to the managers or other groups, and (4) to supervise the company as a whole.
Which are the three most elemental responsibilities and tasks of a board of directors? ›
Boards have 3 primary roles: to establish policies, to make significant and strategic decisions, and to oversee the organization's activity.
- Policy making. Effective execution of policy is necessary to fulfill the other 2 roles. ...
- Decision making. ...
- Oversight.
The person should possess appropriate experience, skills and knowledge in one or more fields of law, finance, management, marketing, sales, research, administration, technical operations, corporate governance, or other disciplines related to the company's business.
What is the role of directors vs officers? ›
Directors: appointed by shareholders to oversee the management of the corporation. Officers: appointed by directors to manage the day-to-day activities of the company.
What kind of knowledge do directors have? ›
Director-specific skills:
Leadership. Accounting and finance. Legal, regulatory and governance. Risk management.
Specifically, they have to comply with three fiduciary duties: care, obedience and loyalty. If board members understand and embrace these responsibilities, they can fulfill those duties and hold their fellow board members accountable to do the same.
What are the 3 legal duties of board members? ›
The basics
Just as for any corporation, the board of directors of a nonprofit has three primary legal duties known as the “duty of care,” “duty of loyalty,” and “duty of obedience.”
What is the most important fiduciary duty? ›
I will speak about duties of directors, but these duties apply to officers also. The most important fiduciary duty is the duty of loyalty. The concept is simple: the decision makers within the company should act in the interests of the company, and not in their own interests.
Does a director own the company? ›
Members of a company, commonly referred to as 'shareholders', are owners of the company. Directors must act in the best interests of the company, but members are generally free to act in their own interests.
When can a director be removed? ›
Methods for Director Removal
Resignation by Directors: When the directors voluntarily tender their resignation. Director Absence from Board Meetings: When a director remains absent from board meetings for 12 months. Shareholder-initiated Removal: When shareholders decide to remove a director.
Can a director delegate his powers? ›
The directors may delegate any of their powers to any committee consisting of one or more directors. They may also delegate to any managing director or any director holding any other executive office such of their powers as they consider desirable to be exercised by him.
