Fiduciary Duties for Directors - Essay Example

?Fiduciary Duties for Directors Under the Delaware Law, business and corporation’s affairs have to be managed through the direction of a board of governors. Section 141(a) of the Delaware General Corporation Law states that “directors, rather than shareholders, manage the business and affairs of a corporation” (Egan, 2007, p. 4). The law specifies that some of the fiduciary duties of a director are care, loyalty and good faith. In Charitable Corp v. Sutton, it was explained that directors of corporations would be regarded as agents and trustees who were required by law to act with ‘fidelity and reasonable diligence” (p.6). These three duties also give rise to a fourth, but equally important duty, that of disclosure. Duty of disclosure means that directors are required to disclose full and truthful information when they are communicating with stakeholders. The Delaware Court of Chancery has in the past stated that “an obligation to the community of interest that sustains the corporation, to exercise judgment in an informed, good faith effort to maximize the corporation’s long term wealth creating capacity” (p.12). Directors of corporations that are facing insolvency owe fiduciary duties to the corporation itself and to shareholder, never to creditors. Duty of Loyalty This fiduciary duty can be traced back to the Guth v Loft case in which the state Supreme Court passed that “corporate officers and directors are not allowed to use their position of trust and confidence to further their private interests” (p.22). The law demands that directors should avoid any actions that can be regarded to be of self-interest or anything that can cause biased behavior which is not supported by stockholders. The duty of loyalty is pegged on the idea and presumption that directors act as trustees and agents to the corporation. In Aronson, the Delaware Supreme Court held that directors are not allowed to take sides during transactions, and nor are they expected to derive personal financial benefits from the said transaction (p.23). Delaware law emphasizes the need to have independent directors serving in corporate boards so as to safeguard shareholder’s interests by protecting the integrity of corporate governance. Conflict of interest does not have to lead to loyalty breach. It is the way in which a director handles the corporation’s affairs that will determine whether or not his conduct led to a breach in loyalty duty. The Delaware fiduciary law lays out some of the situations in which duty of loyalty may be implicated. Thee include: contracts between the company and directors or other corporations in which the director may have some material interest, dealings between a parent company and a subsidiary, management buy outs, corporate reorganizations or acquisitions which may result in differing interests between the majority and minority stakeholders, insider trading, taking over corporate opportunities and competition by the directors with the company. If directors fail to act when faced with a known duty, they can be charged with violating duty of loyalty (p.24). Duty of Care Directors in corporations are obligated by Delaware law to seek ample information before making any business decision. They are also required to “act with the requisite care in making such decisions” (p.32). Although the directors are requires to act with utmost diligence and highest level of due care, they are not obligated to read or to know each and every particular of a contract or any related legal documents. They only need considerable information about a particular situation so as not to make any careless decisions. If the directors are found to have made a decision out of gross negligence, then they can be charged in court for a breach in the duty of care. In order to act diligently, the law in Delaware requires that directors should regularly attend board meetings. They are also required to take their time to review, understand and evaluate all information that they have at their disposal and they should ensure that they take into consideration all the information given to them before making a decision for the corporation. Before making important decisions, corporations’ directors are required to consider information and opinions given by officer, board committees and experts (p.37). Duty of Good Faith While there is no format used to measure good will, case law provides adequate touchstone principles that underlie the director’s duty of good faith. In Cede & Co. v. Technicolor, Inc., it was emphasized that directors should “act honestly, in the best interests of the company and in a manner that is not knowingly unlawful to public policy” (p.39). Under DGCL, a director found to have acted in bad faith can incur personal liability and he may not get indemnification for any expenses incurred during litigation of the liability issue. In Stone v. Ritter, the Supreme Court in Delaware passed that a breach of the duty of good faith leads to a breach of the duties of care and loyalty. When dealing with merger and acquisition transactions, Delaware cooperates follow the business judgment rule which stipulates that directors of a corporation should act in good faith and in the best interests of the company. Directors are required to uphold their duty of care, and this means that they have to make decisions from an informed point of view. When dealing with takeovers, board members are required to as diligently as possible so as to maintain the best interests of the corporation during and after the takeover. Directors have the affirmative duty to seek highest value available to shareholders if the corporation was to be sold (p.47). Kelsey’s Fiduciary Concerns It is clear that Kelsey harbors personal interests in BP. She sees her new opportunity to serve in the board at BP as a way of making it easier for Big Buy Out to have a share of BP. she is delighted to be a part of the company’s board since she believes that the position will not only enhance her personal reputation, she also believes that it will help facilitate deals for Big Buyout Fund. She was also considering not attending all of her board meetings due to her commitments at Big Buy Out. Kelsey has told Dudley that she would be willing to look the other way to enable Dudley to advance BP’s aggressive oil and gas exploration efforts with little regard to safety. There is also the question of Exxon-Mobil which wants to buy BP, but Kelsey has promised Dudley that she will ensure that that does not happen. Dudley is also planning to have a leveraged buyout of BP and is hoping Kelsey will help him get Big Buyout Fund to buy the company. The Fiduciary concerns in this case are many. The first one is Kelsey’s seemingly lack of loyalty to BP. Both Dudley and Kelsey have personal reasons for wanting to be in the board. For Kelsey, it is to ensure that Big Buyout Fund benefits from her position. It is clear that her loyalties lie with Big Buyout Fund and not with BP. By agreeing to Dudley’s propositions for her to look the other way, she is breaching her fiduciary duty of loyalty and care. Choosing to look the other way when Dudley makes inappropriate decisions regarding the company would make Kelsey and accomplice and this would mean that she is not acting in good faith. She would also be neglecting her duty of care by not attending any of the board meetings at BP. Kelsey would be neglecting many of her fiduciary duties by agreeing to what Dudley has discussed with her and this could lea d to serious litigation repercussions. Reference Egan, B.F. Director Fiduciary Duties Under Delaware and Texas Law. Dallas, TX: John Wlaker L.L.P. Read More