California law imposes fiduciary duties upon the officers and directors of a corporation which requires them to conduct themselves in a certain way with regard to the corporation and its shareholders. A fiduciary duty is the highest duty that the law can require and it requires those upon whom the duty is imposed to act only in the interest of the party to whom the duty is owed. The fiduciary duties of officers and directors of a corporation have been codified in California Corporations Code § 309(a), which reads:
“A director shall perform the duties of a director, including duties as a member of any committee of the board upon which the director may serve, in good faith, in a manner such director believes to be in the best interests of the corporation and its shareholders and with such care, including reasonable inquiry, as an ordinarily prudent person in a attorney like position would use under similar circumstances.”
Generally, as long as the officers and directors of a corporation comply with their fiduciary duties, their decisions are protected by business judgment rule, which assumes that officers and directors acted in the best interests of the company on a good faith and informed basis. The decisions of the officers and directors are protected by the business judgment rule, so even if the decision made turns out to be the wrong decision, courts will not second guess decisions made by officers and directors. Again, the business judgment rule only comes into effect so long as officers and directors comply with their fiduciary duties. These duties can generally be categorized as two distinct duties, which are discussed below.
The Duty of Loyalty
The duty of loyalty imposed by California law requires that officers and directors of a company always act in the best interest of the company. This duty requires that officers and directors do not engage in self-dealing, which involves using their position within the corporation to engage in transactions or other conduct that results in a personal benefit. For example, a corporate director could not contract on behalf of the corporation with another company in which he or she had an interest without first disclosing that interest to the other directors or shareholders and having the transaction approved.
The Duty of Care
The duty of care, codified in the final clauses of § 309(a), requires that officers and directors use a certain degree of care when making decisions that pertain to the company. Included in this duty is the requirement that officers and directors make inquiries regarding the prudence of a particular decision. The law allows directors to rely on others, including employees and independent contractor professionals, in making such decisions.
Disputes arising regarding the fiduciary duties of the officers and directors of a corporation can have significant legal consequences for all parties involved. Fortunately, in many cases the assistance of an attorney can help resolve such disputes as favorably as possible and in some cases may help avoid issues before they arise. Accordingly, anyone with questions regarding the legal duties and obligations associated with corporate fiduciary duties should contact a San Jose business lawyer today. To schedule a consultation with one of our attorneys, call Structure Law Group, LLP today at 408-441-7500 or send us an email through our online contact form available here.