USA – UTAH Trends and Developments Contributed by: Layne Smith, Neal Monson, Paul Justensen and Cloe Nixon, Dorsey & Whitney LLP
Utah Fiduciary Duties Fiduciary duties are a key issue for a board of directors to consider in M&A transactions. An understanding of fiduciary duties is important for Utah entities that navigate corporate transactions, and it is an important factor for companies to understand if they choose to form or invest in Utah entities in the M&A context or otherwise. Directors and shareholders in contrast Utah corporate law establishes a fiduciary duty frame - work that is pragmatic and director-friendly. Under the Utah Revised Business Corporation Act (UBCA), directors owe duties of care and loyalty to the corpo - ration. The contours of those duties are defined more by statutory text than by judicial interpretation. As a threshold matter, Utah takes a narrow view of who owes fiduciary duties as compared to certain other jurisdictions, including Delaware. While directors clearly have fiduciary duties, UBCA Section 16-10a-622 provides that a “shareholder of a corporation, when acting solely in the capacity of a shareholder, has no fiduciary duty or other similar duty to any other shareholder of the corporation, includ - ing not having a duty of care, loyalty, or utmost good faith.” Thus shareholders, regardless of whether they are controlling or minority holders, do not owe fiduci - ary duties when acting in their capacity as sharehold - ers. This statutory clarity distinguishes Utah from juris - dictions that extend fiduciary obligations to controlling equity holders and thus limits potential shareholder- based liability. The UBCA provides that directors’ and officers’ con - duct in the discharge of their duties must be in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstanc - es, and in a manner reasonably believed to be in the best interests of the corporation (see UBCA Section 16-10a-840). Liability for breach of the duty of care requires a showing that (i) the standard was breached, and (ii) the person acted with gross negligence, wil - ful misconduct or intentional infliction of harm. Unlike in jurisdictions such as Delaware where there are established guidelines regarding the proper process required to avoid fiduciary liability, Utah courts have not spelled out extensive process requirements. In
practice, successful claims often require showing that not only did the person’s actions breach the duty of care, but that the actions were done with the required mental state. This practice makes standalone duty of
care violations difficult to establish. Conflict of interest transactions
Utah’s statute creates a safe harbour that provides some predictability for approving conflict of interest transactions. The UBCA provides that a transaction involving a conflict of interest is not voidable solely because of the conflict if it is approved by disinter - ested directors, approved by disinterested sharehold - ers, or is otherwise fair to the corporation (see UBCA Section 16-10a-851). This framework offers directors a clear roadmap for insulating conflicted transactions from challenge. However, unlike jurisdictions with extensive case law elaborating on fairness review, Utah provides relatively little judicial guidance on how courts will evaluate fairness in more complex or contested scenarios. The absence of court guidance leads to some uncertainty both for boards who may be required to prove fairness to support a transaction and for minority shareholders who seek to challenge a transaction. Business judgement rule The deferential Utah fiduciary rules are reinforced by the statutory codification of the business judgment rule (see UBCA Section 16-10a-840). The UBCA pre - sumes that directors act on an informed basis, in good faith, and with the honest belief that their decisions serve the corporation’s best interests. To overcome this presumption, a plaintiff must show bad faith, a conflict of interest or a lack of any reasonable basis for the decision. The effect is a robust shield for direc - tors against judicial second-guessing, particularly in routine business decisions. Utah also permits excul - pation provisions that limit monetary liability for duty of care violations, although the practical need for such provisions is somewhat diminished given the already high bar for liability. Limited liability companies By contrast, the Utah Revised Uniform Limited Liabil - ity Company (the “LLC Act”) provides greater flexibil - ity with regards to fiduciary duties for limited liability companies. The LLC Act permits members to modify,
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