On a board of directors - what is your liability?
When serving as a director for a corporation, individuals often times wonder whether the decisions they make as a director will get them in trouble. Fortunately, the law often provides protection for directors who act in good faith and use due diligence through the “business judgment rule.”
The business judgment rule serves as a defense for directors who have been accused of mismanagement through any action or failure to act. Or, as one expert on the subject has summarized, “so long as a decision of the directors has a rational basis, and was made in good faith and for what they honestly believed to be the best interest of the corporation, it [the decision] will not be reviewed by a court.”
With the recent adoption of the Business Corporation Act in Louisiana (LA. R.S. 12:1-101, et seq.), the standard of conduct with which directors are to comply has been better defined. Specifically, the Act provides that directors shall act in good faith and in a manner that the director reasonably believes is in the best interest of the corporation. The Act also provides that directors must disclose information that is material to the discharge of their duties, unless such disclosure would violate the law or other rule of confidentiality. In discharging ones duties, the law offers that a director may rely on, among other things, other officers, reports, and expert opinions.
For a director to be found liable, the Act requires that the following be established:
(1) There are no statutory defenses; and
(2) The challenged conduct consisted or was the result of one of the following:
(a) Action not in good faith;
(b) A decision that the director did not reasonably believe to be in the best interest of the corporation, or as to which the director was not informed to an extent the director reasonably believed appropriate in the circumstances;
(c) A lack of objectivity due to the directors familial, financial, or business relationship with, or lack of independence due to the director’s dominion or control by, another person having a material interest in the challenged conduct, which relationship could reasonably be expected to have affected the director’s judgment in a manner adverse to the corporation, and after established, the conduct was not in the best interest of the corporation;
(d) A sustained failure of the director to devote attention to an ongoing oversight of the business and affairs of the corporation, or a failure to devote timely attention, by making, or causing to be made, appropriate inquiry, when particular facts and circumstances of significant concern materialize that would reasonably alert a reasonably attentive director to the need therefore.
(e) Receipt of a financial benefit to which the director was not entitled, or any other breach of the director’s duties to deal fairly with the corporation and its shareholders that is actionable under applicable law.
Finally, the party seeking to hold a director liable for their actions must prove harm to the corporation that was proximately caused by the director’s challenged conduct.
The ultimate purpose of the business judgment rule is to protect directors for making responsible, diligent decisions on behalf of the corporation. Otherwise, companies would be unable to operate because every director would be saddled with the constant fear of being sued for making a decision regarding the operations of the company.
If you have questions about your liability or your business – call us; our attorneys have the expertise and experience to guide you forward.