Standard of Conduct of Corporate Directors

This post is the first of a four-part series in which I will discuss statutory and common-law duties of a company’s directors, officers, and shareholders. In a closely-held corporation, a shareholder is often wearing three hats – shareholder, director, and officer of the company. It is important for individuals in this situation to understand that their motivations as a shareholder could conflict with their duties as a director or officer. In the final post, I will discuss some best practices for owners, directors, and officers of closely-held corporations in discharging their overlapping duties. (Note that for purposes of these posts, I will refer to “directors” and “shareholders” of corporations formed under the Minnesota Business Corporation Act, but the duties of members, governors, and officers of a Minnesota LLC are, in most cases, analogous to those of their MBCA counterparts.)

The Minnesota Business Corporation Act imposes a statutory standard of conduct on directors in Section 302A.251:

A director shall discharge the duties of the position of director in good faith, in a manner the director reasonably believes to be in the best interests of the corporation, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.

This statutory duty is often explained as two duties – a “duty of loyalty” and a “duty of care.”  Discussions of these two duties fills lengthy passages in corporate treatises. In general, breaches of a duty of loyalty often involve a director approving a transaction in which the director has a financial or personal interest, or a director taking advantage of business opportunity that actually belonged to the corporation. In both cases, the director may not have acted in a way that he or she “reasonably believed” to be “in the best interests of the corporation.”

Breaches of the duty of care typically involve a director making a decision without the care that “an ordinarily prudent person in a like position would exercise under similar circumstances,” that is, making a decision or voting on a material matter without adequate information or proper analysis of the information.  The duty of care often works hand-in-hand with the “Business Judgment Rule,” to be discussed in a later post.

As noted above, a shareholder of a closely-held corporation who is also a director may have conflicting motivations when faced with a significant opportunity. For example, when faced with the decision close on a risky corporate transaction that could either bankrupt the company or provide significant future growth, the decision may differ depending on which hat the shareholder is wearing.

In the next post, I will review the standard of conduct of corporate officers.

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Related Posts:

Standard of Conduct of Corporate Officers

Shareholder Duties in a Closely-Held Corporation

Company Signatures to Member Control and Buy-Sell Agreements