Duties of the Corporation
Directors and officers of corporations throughout the United States have three long-standing recognized duties to the corporation itself. They are: the duty of care; the duty of loyalty; and the duty of obedience. These duties are typically grounded in state law. The duty of care requires corporate directors and officers to exercise their corporate responsibilities in good faith, with the care of an ordinary prudent person in a like position, and in a manner one reasonably believes to be in, and not opposed to, the best interest of the corporation. The duty of loyalty requires that directors and officers exercise their powers in the primary interest of the corporation rather than out of self-interest, and not usurp corporate opportunities for their own benefit at the expense of the corporation. The duty of obedience requires that corporate directors and officers issue all corporate financial reports in a timely manner, issue dividend checks properly, hold regularly scheduled annual shareholder meetings, and adhere to the articles of incorporation, bylaws, and guidelines of the corporate charter.[1]
Under the Revised Code of Washington (RCW), both directors and officers of corporations registered with the Washington Secretary of State, Divisions of Corporations and Charities have four Basic Standards of Conduct.[2] First, they shall discharge their duties: (1) In good faith; (2) With the care an ordinary prudent person in a like position would exercise under similar circumstances; and (3) In a manner the officers reasonably believe to be in the best interests of the corporation. Second, in discharging their duties, directors and officers are entitled to rely on information, opinions, reports, or statements. This including financial statements and other financial data if prepared by one or more officers or employees of the corporation reliable and competent in the matters at issue, or legal counsel, public accountants or other persons who are experts with professional competence.[3] Third, a director or officer does not act in good faith if one has knowledge of a matter that makes reliance on others unwarranted. Finally, directors and officers are not liable for any action undertaken in their respective corporate capacities in compliance with these standards of conduct.
When a corporate director or officer fails to adhere to any of the above responsibilities, he or she is accountable to the corporation typically in the form of a derivative action filed in state court. Derivative actions are lawsuits filed by shareholders on behalf of the corporation against its directors and officers for malfeasance, misfeasance, or nonfeasance.[4] As a precondition to the filing of a shareholder derivative action, the shareholders must first make a demand on the board of directors. However, in reliance upon the case of In re F5 networks, Inc., 207 P.3d 433 (Wash. 2009), where such a demand would be futile, it would be excused. Typically, corporate directors and officers rely on the business judgment rule to protect themselves from liability. The business judgment rule is a presumption that courts invoke in lawsuits pled against corporate directors and officers. It presumes that the corporate directors have exercised proper business judgment with due care and that those corporate directors and officers operated with an understanding of the corporate business model which courts cannot fully understand or appreciate.
Therefore, courts won’t second-guess the “business judgments” of the corporation’s directors and officers. The presumption is rebuttable. When a plaintiff factually establishes a breach of the duty of loyalty, a lack of due care, or nonfeasance, the presumption is rebutted. Indeed, directors and officers in jurisdictions other than Washington State have been found liable based upon any of the following actions or inactions, among others: By abdicating their functions or failing to act; [5] By ratifying material transactions without appropriate analysis and consideration;[6] and By failing to implement reporting systems allowing directors to monitor corporate compliance and make informed decisions.[7] In the case of Riss v. Angel, 934 P.2d 669 (1997), the Supreme Court of Washington recognized that it should not substitute its judgment for that of a homeowners’ associations’ board of directors. However, it rejected the “business judgment” of the board, where the “… decision was unreasonable and arbitrary and in violation of the covenants because it was made without adequate investigation and was based upon inaccurate information.”
[1] See William E. Knepper & Dan Bailey, Liability of Corporate Officers and Directors, § 1 (7th ed. 2004).
[2] RCW 23B.08.300 for direcors and RCW 23B.08.420 for officers.
[3] Unlike the Standards of conduct for officers, the general standards for directors allow directors to rely on a committee of fellow board of directors, in discharging their duties.
[4] Rule 23.1 of the Washington State Court Rules governs derivative Actions in Washington State.
[5] Aronson v. Lewis, 473 A 2d 805 (Del. 1984).
[6] Smith v. Van Gorkom 488 A.2d 858 (Del. 1985).
[7] In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996).
Under the Revised Code of Washington (RCW), both directors and officers of corporations registered with the Washington Secretary of State, Divisions of Corporations and Charities have four Basic Standards of Conduct.[2] First, they shall discharge their duties: (1) In good faith; (2) With the care an ordinary prudent person in a like position would exercise under similar circumstances; and (3) In a manner the officers reasonably believe to be in the best interests of the corporation. Second, in discharging their duties, directors and officers are entitled to rely on information, opinions, reports, or statements. This including financial statements and other financial data if prepared by one or more officers or employees of the corporation reliable and competent in the matters at issue, or legal counsel, public accountants or other persons who are experts with professional competence.[3] Third, a director or officer does not act in good faith if one has knowledge of a matter that makes reliance on others unwarranted. Finally, directors and officers are not liable for any action undertaken in their respective corporate capacities in compliance with these standards of conduct.
When a corporate director or officer fails to adhere to any of the above responsibilities, he or she is accountable to the corporation typically in the form of a derivative action filed in state court. Derivative actions are lawsuits filed by shareholders on behalf of the corporation against its directors and officers for malfeasance, misfeasance, or nonfeasance.[4] As a precondition to the filing of a shareholder derivative action, the shareholders must first make a demand on the board of directors. However, in reliance upon the case of In re F5 networks, Inc., 207 P.3d 433 (Wash. 2009), where such a demand would be futile, it would be excused. Typically, corporate directors and officers rely on the business judgment rule to protect themselves from liability. The business judgment rule is a presumption that courts invoke in lawsuits pled against corporate directors and officers. It presumes that the corporate directors have exercised proper business judgment with due care and that those corporate directors and officers operated with an understanding of the corporate business model which courts cannot fully understand or appreciate.
Therefore, courts won’t second-guess the “business judgments” of the corporation’s directors and officers. The presumption is rebuttable. When a plaintiff factually establishes a breach of the duty of loyalty, a lack of due care, or nonfeasance, the presumption is rebutted. Indeed, directors and officers in jurisdictions other than Washington State have been found liable based upon any of the following actions or inactions, among others: By abdicating their functions or failing to act; [5] By ratifying material transactions without appropriate analysis and consideration;[6] and By failing to implement reporting systems allowing directors to monitor corporate compliance and make informed decisions.[7] In the case of Riss v. Angel, 934 P.2d 669 (1997), the Supreme Court of Washington recognized that it should not substitute its judgment for that of a homeowners’ associations’ board of directors. However, it rejected the “business judgment” of the board, where the “… decision was unreasonable and arbitrary and in violation of the covenants because it was made without adequate investigation and was based upon inaccurate information.”
[1] See William E. Knepper & Dan Bailey, Liability of Corporate Officers and Directors, § 1 (7th ed. 2004).
[2] RCW 23B.08.300 for direcors and RCW 23B.08.420 for officers.
[3] Unlike the Standards of conduct for officers, the general standards for directors allow directors to rely on a committee of fellow board of directors, in discharging their duties.
[4] Rule 23.1 of the Washington State Court Rules governs derivative Actions in Washington State.
[5] Aronson v. Lewis, 473 A 2d 805 (Del. 1984).
[6] Smith v. Van Gorkom 488 A.2d 858 (Del. 1985).
[7] In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996).