Directors of corporations are expected, at all times, to act in accordance with their fiduciary duties. Fiduciary duties is a common law term which has been construed to mean that directors are expected to act “in good faith,” in the best interest of the company or corporation, and to exercise their power as director with the same level of care that an ordinary person would exhibit in the same situation.
In addressing loyalty and care, the first two parts of fiduciary duties, acting in good faith and in the best interest of the corporation, have become the “loyalty” part of “loyalty and care.” The third part, acting with the level of care of a similar or ordinary person in the same situation, has become the “care” portion of fiduciary duties.
Care is much easier to understand and explain than the other two areas. Basically, the duty that the director is supposed to meet is the same standard as the “reasonable person” standard in determining simple negligence cases. If the director meets what an ordinary person would have done then he or she has not breached the fiduciary duty of care. If the level of an ordinary person is not met, then the fiduciary duty of care has been breached.
In exercising the duty of care, management board is expected to gather as much information as possible. In the Caremark cases, it was determined that a corporation or board of directors can’t sit on its hands and wait for the information it needs to come to it. The board must actively go out and get the information in order not to breach the duty of care.
Loyalty is slightly harder to explain in a paragraph than care. Loyalty means that the director must always act in the best interest of the corporation. If there is a conflict of interest that might benefit the director more than the corporation if it ends up one way, then the director is expected to act in the absolute best interest of the corporation.
For example, if a corporate opportunity arises but is presented to a director outside of his or her capacity as director of a corporation but rather as an individual, the director is expected to refuse the corporate opportunity. If possible, and if it is legal, the director should actually try to ensure that opportunity for the corporation. A simple opportunity becomes a corporate opportunity when the opportunity presented is in the same line of business as the corporation or the corporation has an interest or expectancy in the opportunity.