USA Law and Practice Contributed by: Lisa Fontenot, Jennifer Broder, Per Chilstrom and Lothar Determann, Baker McKenzie
3.8 Breach of Directors’ Duties A breach of fiduciary duties can be enforced by share - holders through derivative actions, the corporation itself and, in certain cases, regulatory authorities such as the SEC. Consequences of a breach may include: • recovery of damages, depending on the nature of the breach and available protections; • disgorgement of profits gained through improper use of their position or corporate assets; • equitable remedies, such as injunctions to prevent harmful actions or rescind conflicted transactions; • removal from office; • bar from future service; and • criminal and civil penalties. 3.9 Other Claims/Enforcement Against Directors/Officers See 3.6 Legal Duties of Directors/Officers regard - ing the primary standards of judicial review of board conduct. Directors and officers may face claims for breach of fiduciary duty, statutory claims and regulatory enforcement, which may result in civil or criminal pen - alties, such as for federal securities law violations or ERISA violations. In bankruptcy, trustees or creditors may pursue claims against directors and officers for breaches of duty or fraudulent transfers. Limiting Director/Officer Liability Delaware law provides multiple mechanisms to limit director and officer liability. Exculpation The Delaware General Corporation Law allows corpo - rations to include exculpatory provisions in their certif - icates of incorporation eliminating or limiting personal liability of directors and officers to the corporation or its shareholders for monetary damages for breaches of the duty of care but not for breaches of the duty of loyalty, acts or omissions committed in bad faith or involving intentional misconduct or knowing violations of law, transactions in which the director or officer received an improper personal benefit, or liabilities for payment of unlawful dividends or unlawful stock pur -
In Delaware, directors must make good-faith efforts to oversee the corporation’s operations through the implementation and monitoring of a board-level infor - mation and reporting system designed to keep the board informed of critical risks. Business Judgement Rule To permit directors to take reasonable risks for the benefit of the corporation, the business judgement rule presumes that disinterested and independent directors act on an informed basis and in the honest belief that the action was taken in the best interest of the corporation, unless a plaintiff can show that a majority of the directors did not meet the requirements that each director must: • keep informed about the corporation and its deci - sions; • act in good faith; and • reasonably believe that the action or transaction was made in the best interest of the corporation. If directors have fulfilled their duties of care and loy - alty, their decisions will generally be protected by the presumption of the business judgement rule. How - ever, if a plaintiff satisfies the burden of showing that directors failed to discharge the duty of care or the duty of loyalty, the board could lose the protections of the business judgement rule and its actions could be subject to a higher standard of judicial scrutiny. In Delaware and many other states, similar fiduciary duties are typically owed by the partners in a general partnership, the general partners in a limited partner - ship and the managers or managing members, as applicable, in an LLC. However, Delaware and certain other states permit these duties to be limited or elimi - nated entirely in organisational documents. 3.7 Responsibility/Accountability of Directors Directors owe duties to the corporation and its share - holders. In insolvency, creditors replace shareholders as primary beneficiaries of duties and gain deriva - tive standing as there is no direct duty to creditors. Directors of public benefit corporations must balance shareholder interests with specified public benefits and stakeholder considerations.
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