Outline

Daily Thoughts

VI. Corporate Duties
  A. Duty of Care
    1. Standard of Care
      a. Duty of oversight

 

  • Role/function of directors - "Corporate Director's Guidebook" 
    • become informed 
    • attend meetings 
    • set corporate strategy 
    • select / monitor / fire CEO 
    • respond to conflicts / illegality / crises
  •  Duty to supervise / monitor 
    •  mismanagement 
      • duty to be informed? 
      • causation: could directors have prevented?
    • defalcations / diversions 
      • duty to investigate? 
      • causation: relaxed analysis
    • illegality 
      • duty to investigate? only when "on notice"? create monitoring devices? 
      • reaction to danger signs / correct behaviro / liability for failure not to respond
  • Relation of monitoring duty to  
    • business judgment rule 
    • MBCA 8.30(a)
  • Duty of lawyer in representing director / corporation 
    • lawyer as director 
    • multiple representation

 

 Delaware judge William Allen says, 
"My observation (which is quite different than the one many lawyers have) was that most people on a board want to do the right thing. The fundamental problem is not that they are lazy or that they are mildly corrupt. The fundamental problem was that so often it was not clear what the right thing to do was." 
Class Notes
 
 

Francis v. United Jersey Bank
 (NJ 1981)


Pritchard & Baird Corp is in the reinsurance brokerage business -- and the company handles a lot of money.  Assume you are a director of the company.  What are your responsibilities -

  • under state corporate statutes  - any mention of fiduciary duties? 
  • under business understandings of the role of a director 
How much do you have to know about the business?  Do you have to learn financial statements?  Must you become as familiar with the business as the company's executives?
NC Bus Corp Act 55-8-30 General standards for directors.

 (a) A director shall discharge his duties as a director ... :

  (1) In good faith;
  (2) With the care an ordinarily prudent person in a like position would exercise under similar circumstances; and
  (3) In a manner he reasonably believes to be in the best interests of the corporation.


 

Director responsibilities - See ABA Section of Business Law "Corporate Director's Guidebook"

  • Set corporate policy / strategies 
  • Ensure policy / strategies carried out  
    • attend meetings 
    • keep informed about company's business 
    • regularly review financial status 
  • Hire / fire / compensating executive officers 
  • Monitor for illegality / misconduct 
    • monitor management performance 
    • not shut eyes to bad acts 
    • object to illegality / misconduct 
  • Manage business in crisis 
William Pritchard Sr. founded the company, but after he dies his two sons (William and Charles) run the business into the ground.  They steal $10 million of clients' money, covering up their defalcations as "loans" in the company's financial statements.
 
 
Balance Sheet
Assets
  Cash
  Sh loans

Total

Liabilities
  Clients

Equity
  Shareholders

Total

Who was the plaintiff?  What did Francis allege? Mrs Pritchard became a director after Mr. Pritchard's death.  What must a director do in carrying out her responsibilities?  To whom do directors owe these duties?

Mrs. Pritchard "became incapacitated and was bedridden [and] became listless and ... started to drink rather heavily."  She did not attend meetings of the board of directors "never knew what her sons were doing ..."  What could Mrs. Pritchard have done?  What would you, as corporate counsel, advise that she do?  Would it have stopped her sons' thefts?

NC Bus Corp Act 55-8-30 General standards for directors.

 (a) A director shall discharge his duties as a director ... :

  (1) In good faith;
  (2) With the care an ordinarily prudent person in a like position would exercise under similar circumstances; and
  (3) In a manner he reasonably believes to be in the best interests of the corporation.

NJ Supreme Court:

 "Her neglect of duty contributed to the climate of corruption; her failure to act contributed to the continuation of that corruption.  Consequently, her conduct was a substantial factor contributing to the loss.

 "Sometimes ... a director may have a duty to take reasonable means to prevent illegal conduct by co-directors; in an appropriate case, this may include threat of suit."

Hypothetical 

 

You are outside counsel to Pritchard and Baird.  Lillian Pritchard asks you to advise her on what to do as director.  You give her the "Corporate Director's Guidebook" and tell her to read it.  She does and concludes she is in over her head.  She asks you to become director in her place?  What should you say?  She stays on as director and asks for you to counsel her on action she should take regarding suspicions of her sons.  Should you counsel her?

See Rules of Professional Responsibility.
Hypothetical 

William Jr and Charles, rather than evil, are just witless -- a case of "good genes gone bad."  They make foolish decisions and run the business into the ground through sheer incompetence.  Mrs Pritchard, absent and intoxicated, fails in her directorial responsibilities.   Is she liable for her utter lack of care?   Would witless William and Charles be?   What could Mrs. Pritchard have done?

NC Bus Corp Act 55-8-30 General standards for directors.

 (a) A director shall discharge his duties as a director ... :

  (1) In good faith;
  (2) With the care an ordinarily prudent person in a like position would exercise under similar circumstances; and
  (3) In a manner he reasonably believes to be in the best interests of the corporation.

Hypothetical

 

Mrs. Pritchard, worried about her directorial responsibilities, asks for your advice.  She suspects William and Charles are taking more money from the business than they should.  She says that at the next meeting she worries they will propose loans for themselves.   What should she do?

NC Bus Corp Act 55-8-24  Quorum and voting.

 (d) A director who is present at a meeting of the board of directors ... when corporate action is taken is deemed to have assented to the action taken unless:

  (1) He objects at the beginning of the meeting ... to holding it ...
  (2) His dissent or abstention from the action taken is entered in the minutes of the meeting; or
  (3) He files written notice of his dissent or abstention with the presiding officer of the meeting before its adjournment or with the corporation immediately after adjournment ... The right of dissent or abstention is not available to a director who votes in favor of the action taken.
 

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2004 Professor Alan R. Palmiter

 

This page was last updated on: October 27, 2004