Serving on the Board of
Directors of any corporation can be a great opportunity for both personal and
financial growth. As with everything in life, however, in order to receive, one
must also give. This article will summarize the responsibilities imposed by the
law on directors who serve in the state of Florida. The law to which we will be
referring is judicial common law and Florida Statutes. Specifically, we will
examine Florida Statutes Sections 607.0801 through 607.0832, which are the sections of
the Florida Business Corporation Act that address boards of directors.
These
sources of obligation are in addition to the articles of incorporation and
bylaws specific and unique to each corporation, which often supersede the base
standards set by statute. If the directors fulfill their duties, they will be
protected from personal liability for negative consequences of their decisions
by the business judgment rule. A convenient way to organize the obligations
imposed by these sources of law is according to the three broadly defined
duties of directors: the Duty of Good Faith, the Duty of Care, and the Duty of
Loyalty.
The Duty to Act in Good Faith
Good faith and fair dealing
mean what they sound like they mean. This duty imposes more than the default
standard of care that we owe to everyone around us. Because of the unique
nature of the board of directors, especially considering their relationship to
the corporation and the power they wield over the company’s long term
viability, they are held to a higher standard. This duty is perhaps best
understood in terms of what is not good faith. The Florida
Supreme Court examined good faith in the context of the duties of an insurer to
an insured. Berges v. Infinity Ins. Co., 896 So. 2d 665, (Fla. 2004).
There, the Court found that “good faith” involved exercising care in the
handling of the claim, including investigating and disclosing reasonable
settlement offers to the insured.
In the same way, boards of directors will be
expected to act reasonably in investigating consequences of decisions and
alternatives before making a final plan. This duty can be understood as being
distinct from the other duties because it applies to interactions between the
board and the corporation, whereas the other two duties deal with the board’s
internal procedures and the board’s interactions with those outside the
corporation.
The Duty of Care
The law expects directors to
exercise reasonable care in their decision making process. This means that
directors must act the way that a reasonably prudent director would act under
the same or similar circumstances. While the board is not responsible for day
to day operations of the corporation, they are responsible for the strategic
planning of the company and must ensure that the corporation’s obligations are
being met overall. Therefore, this duty applies to the board’s internal
decision making procedures, including the evaluation of sources of information.
Furthermore, this duty of care generally requires directors to attend meetings
of the board, make informed decisions, exercise independent judgment, monitor
the performance of the company, and maintain records of the board meetings.
Directors should read and understand the articles of incorporation of the
company and the bylaws.
The Duty of Loyalty
Fulfilling the duty of loyalty
means that the board must have undivided loyalty to the corporation and make
decisions that are in the best interests of the corporation. Note that this
obligation does not belong to any one individual within the corporation, but
rather the organization itself, as a whole. This duty is most frequently
violated when board members vote on decisions where conflicts of interest are
present and when directors engage in self-dealing. Keep in mind that the
corporation’s articles of incorporation and bylaws trump the statutory
guidelines with regard to conflicts of interest. It is highly advisable for a
corporation to have clearly written procedures for dealing with conflicts of
interest. Transactions that would be self-dealing can be cleansed, according to Florida Statutes Section 607.0832, if (1) the director
discloses the conflict to the board and the board votes by a majority in favor
of the transaction, (2) the director discloses the conflict to the shareholders
and they vote by a majority in favor of the transaction, and (3) the
transaction was fair and reasonable to the corporation at the time it was voted
on.
The Business Judgment Rule
The common law business
judgment rule states that directors who serve on a board for a company cannot
be held personally liable for the negative consequences of decisions they make
using their discretion as businesspeople. Florida has codified the business
judgment rule in Section 607.0831, which states that a director
will not be personally liable for monetary damages as a result of something
they did as a director unless their conduct falls under one of five stated
categories of breach. Those five categories are: violation of a criminal law
(unless there was reasonable cause for the director to think that their conduct
was lawful or there was no reason to think their conduct was unlawful), uncured
self-dealing, unlawful distributions to shareholders, disregard of the best
interests of the corporation in a shareholder suit, and bad faith in a
shareholder suit.
An example where the business
judgment rule would not protect the actions of a director would be when the
director makes a unilateral decision to enter into a business transaction from
which he will receive a sales commission. Aerospace Accessory Service, Inc. v.
Abiseid, 943 So. 2d 866 (Fla. Dist. Ct. App. 2006). In Aerospace Accessory
Service, the court ruled that the defendant director/ salesman could not
“burrow under the protective blanket” of the business judgment rule because he
clearly fell under the self-dealing category of exemptions codified in §607.0831.
Conclusion
It is not difficult to fulfill
these duties and obtain this protection as long as each director takes their
position seriously. Diligence and commitment are essential because the board of
directors must thoughtfully examine the various governing documents and weigh
the company’s options in order to best serve the company.
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