Saudi Electronic University Fiduciary Duties Under Corporate Law Analysiss

Write an analysis of the various fiduciary duties under corporate law and what best practices are followed by Directors in fulfilling their duty. In your analysis discuss how the business judgment rule is used in litigation, who favors the use of the business judgment rule, and when does the business judgment rule not apply.

Chapter 8
Introduction to Fiduciary Duty: The Duty of
Care and the Business Judgment Rule
Introduction to Fiduciary Duty: The Duty of
Care and the Business Judgment Rule
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Introduction
The book defines fiduciary relationship as:
“created when one is give the power that carries a duty to use
that power to benefit another.1”
Fiduciary relationships include:
➢ Trustee relationships
➢ Beneficiaries of trusts
➢ Partners or agents to principals
Enforcement of fiduciary duty is used to reduce mismanagement
of the company or unfair self-dealing.
Fiduciaries are accountable to shareholders and directors of the
company.
Introduction to Fiduciary Duty: The Duty of Care
and the Business Judgment Rule
The Fiduciary Duties
1. Duty of Loyalty
2. Duty of Care
3. Duty of Good Faith
Introduction to Fiduciary Duty: The Duty of
Care and the Business Judgment Rule
Care and loyalty
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“The characterization of someone as a fiduciary generally means
that the individual has to obey certain duties and look out for the
interests of whoever is owed the duty.”
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Fiduciaries are bound by a duty of care and duty of loyalty and
the duty of good faith.
Introduction to Fiduciary Duty: The Duty of
Care and the Business Judgment Rule
Duty of loyalty
➢ Duty of loyalty:
❖ Act in the best interests of the company and in good
faith.
❖ A lack of duty loyalty involves intent to harm the
company and dereliction of duty.
▪ Can occur when the person responsible for the
fiduciary duty puts his/her own interests over the
interests of the company.
❖ Courts will get involved in cases where the person in
charge of fiduciary duty puts their personal interests over
loyalty of duty.
Introduction to Fiduciary Duty: The Duty of
Care and the Business Judgment Rule
Duty of Care
➢ Duty of care:
❖ Directors perform their duties with care and diligence.
❖ Can be liable for both
• Malfeasance; and
• Nonfeasance.
❖ Protected under business judgment rule (limits court
questioning business decisions).
Introduction to Fiduciary Duty: The Duty of
Care and the Business Judgment Rule
Care and loyalty
The textbook states the difference between duty of loyalty and
duty of care is as follows:
“Thus, in duty of loyalty cases involving a conflict of interest,
there is more judicial involvement and scrutiny than in duty
of care or good faith cases.11
The difference is justified because in a duty of care case, the
courts want to protect business decisions that are intended to
enhance corporate gain, while in a duty of loyalty involving a
conflict of interest case the directors may be motivated by
personal gain.12”
Introduction to Fiduciary Duty: The Duty of
Care and the Business Judgment Rule
Policy issues
• “The fiduciary duty of those who manage or control is to the
corporation and shareholders and the shareholders have the
right to enforce it through litigation.”
• Publicly traded companies have outside directors to monitor the
inside directors.
• Company representatives disagree on the involvement of
litigation to enforce fiduciary responsibility:
➢ Shareholders want judicial scrutiny.
➢ Managers who have fiduciary duties do not want judicial
scrutiny.
Introduction to Fiduciary Duty: The Duty of
Care and the Business Judgment Rule
Policy issues
• Law and economics approach
➢ View the relationship between shareholders and managers as
a contract.
➢ The duties of the fiduciary manager are included in the terms
of the contract.
➢ Detractors of this approach include shareholders who would
not be able to negotiate the contract.
Introduction to Fiduciary Duty: The Duty of
Care and the Business Judgment Rule
Duty of care
• Liability under duty of care requires:
➢ Finding duty
➢ Breach
➢ Proximate cause and loss
• “Issues of breach of duty of care can arise in two kinds of
situations; when:
➢ There is a failure to act or monitor where a loss could
have been prevented (i.e., nonfeasance)
➢ There is a decision made in a negligent manner (i.e.,
malfeasance).”
Introduction to Fiduciary Duty: The Duty of
Care and the Business Judgment Rule
Malfeasance and the business judgment rule
• Malfeasance occurs when directors are accused of making illadvised decisions or negligence of duties.
• The ill-advised decisions are subject to judicial review and can
be protected under the business judgment rule.
• Even if malfeasance is found, finding causation may be required.
Introduction to Fiduciary Duty: The Duty of
Care and the Business Judgment Rule
Malfeasance and the business judgment rule
• Business judgment rule
➢ “limits judicial inquiry into business decisions and protects
directors who are not negligent in the decision making
process.”
➢ Courts defer to the director’s decision and do not infer that
they have more knowledge over business decisions than the
director’s.
➢ Under this rule, courts will review the process of the process,
not the decision.
Introduction to Fiduciary Duty: The Duty of
Care and the Business Judgment Rule
Causation
• Breach of duty does not necessarily end the inquiry.
• The actual cause of the breach of duty must be found.
• Plaintiffs have the burden of proof and must prove themselves
free of negligence.
• Plaintiffs must also show the amount of damages.
Introduction to Fiduciary Duty: The Duty of
Care and the Business Judgment Rule
Duty of Good faith
• “Lack of good faith would include
➢ Conduct motivated by subjective bad intent
➢ By an actual intent to harm the corporation
➢ An intentional dereliction of duty and a conscious disregard
for one’s responsibilities would also constitute a lack of good
faith because it shows more culpability..”