For most corporations the directors and officers have the authority to make the major decisions for the company. However, this power is not absolute as they have to answer to the shareholders for any important changes. When the shareholders feel that the directors or officers are abusing their power, the shareholders have the ability to sue the company in a derivative suit for mismanagement or negligence. Although the shareholders are the “owners” of the company, the directors and officers are protected by the business judgment rule.
Business Judgment Rule
The business judgment rule is a principle of corporate governance that has traditionally operated as a shield to protect directors from liability for their decisions. The idea is that if the directors are entitled to the protection of the rule, then the courts should not interfere with or second-guess their decisions. If directors are not entitled to the protection of the rule, the courts scrutinize the decision as to its intrinsic fairness to the corporation and the corporation’s minority shareholders. The rule is a rebuttable presumption that directors are better equipped than the courts to make business judgments and that the directors acted without self-dealing or personal interest and exercised reasonable diligence and acted with good faith.
Accordingly, the application of the business judgment rule operates in conjunction with the fiduciary duties of corporate directors and officers. A fiduciary duty is a legal relationship based on trust and confidence between different parties. Thus, the officers and directors have fiduciary duties to the shareholders and the company as an operation of the law. These duties include a duty of loyalty, due care, and good faith.
The duty of loyalty generally comes into play when there is a conflict of interest between the corporation and the officers or directors. Although there are different tests depending on the state, once it is shown that there is a conflict of interest or a corporate opportunity, the business judgment rule does not apply and the burden shifts to the director or officer to disprove a breach of loyalty. As for the duties of due care and good faith, the business judgment rules applies and it is up to the shareholders to show gross negligence by the directors or officers. However, courts have struggled with the exact tests to show a breach of due care or good faith.
Corporate Reorganization Demands Experienced Lawyers
Corporate reorganization brings about major changes for a company and requires significant foresight and planning. Because of the fiduciary duties that officers and directors owe to the company, it is particularly important to consult with an experienced attorney when considering reorganization. Schedule an appointment with Lanigan and Lanigan P.L., in Winter Park, Florida if your company needs help with restructuring.