Duty of Care/Good Faith/Loyalty/Oversight/Blah Blah Blah Forum

[AVBucks4239]

As the title suggests I can't separate these in my Business Associations Class. My casebook and professor mismashed them all together and I can't figure it out. My supplement also puts them all in one chapter called fiduciary duties, which is thus zero help.

Help? Please?

[MinEMorris]

The fiduciary duties of the different business associations (e.g. agency, partnerships, corporations) vary. I really only remember with much accuracy the fiduciary duties owned by the the board of directors to shareholders, but I think understanding that will help you understand the fiduciary duties in other relationships as well, so I'll break them down to the best of my ability here.

The board of directors has two general fiduciary duties that it owes to the shareholders: a duty of care and a duty of loyalty. The duty of care basically sets the standards for the diligence with which the board must perform its tasks. For example, the duty of care requires that the board of directors must be informed and act in the best interests of the shareholders when it performs its tasks. The duty of loyalty, however, focuses specifically on the problem of conflicts of interests. It mandates that the interests of the shareholders takes precedence over the personal interests of any members of the board. At a micro level, the duty of loyalty is a list of rules and procedures meant to help achieve this result.

Acting in good faith is one of the basic requirements of the duty of care. Confusingly, there is also a "duty to act in good faith" that is sometimes talked about as though it is an independent duty. This latter duty to act in good faith is a duty to ensure that the corporation's operations comply with the law. Modernly, this is understood as meaning that corporations should have various law-compliance systems in place, such as procedures in place for employees to report legal misconduct by coworkers. Despite how it is sometimes talked about, this duty to act in good faith is not considered separate from the duties of care and loyalty. Recent Delware precedent (Stone v. Ritter, I think?) seems to have settled that it is part of the duty of loyalty. This came as a surprise to some people, since law compliance seems to be something more in the line with diligence standards, which the duty of care governs, than with the self-dealing standards dealt with by the duty of loyalty. The likely reason for putting the "duty to act in good faith" in the duty of loyalty is so that liability for violating it couldn't be abrogated by DGCL 102(b)(7). (DGCL 102(b)(7) can only reduce liability for duty of care violations.)

Hope that helps. I'm glad to elaborate where I can and as best as I can.

P.S. devoting ongoing attention/oversight is just part of the duty of care. See MBCA 8.31(a)(2)(iv).

[AVBucks4239]

The fiduciary duties of the different business associations (e.g. agency, partnerships, corporations) vary. I really only remember with much accuracy the fiduciary duties owned by the the board of directors to shareholders, but I think understanding that will help you understand the fiduciary duties in other relationships as well, so I'll break them down to the best of my ability here.

The board of directors has two general fiduciary duties that it owes to the shareholders: a duty of care and a duty of loyalty. The duty of care basically sets the standards for the diligence with which the board must perform its tasks. For example, the duty of care requires that the board of directors must be informed and act in the best interests of the shareholders when it performs its tasks. The duty of loyalty, however, focuses specifically on the problem of conflicts of interests. It mandates that the interests of the shareholders takes precedence over the personal interests of any members of the board. At a micro level, the duty of loyalty is a list of rules and procedures meant to help achieve this result.

Acting in good faith is one of the basic requirements of the duty of care. Confusingly, there is also a "duty to act in good faith" that is sometimes talked about as though it is an independent duty. This latter duty to act in good faith is a duty to ensure that the corporation's operations comply with the law. Modernly, this is understood as meaning that corporations should have various law-compliance systems in place, such as procedures in place for employees to report legal misconduct by coworkers. Despite how it is sometimes talked about, this duty to act in good faith is not considered separate from the duties of care and loyalty. Recent Delware precedent (Stone v. Ritter, I think?) seems to have settled that it is part of the duty of loyalty. This came as a surprise to some people, since law compliance seems to be something more in the line with diligence standards, which the duty of care governs, than with the self-dealing standards dealt with by the duty of loyalty. The likely reason for putting the "duty to act in good faith" in the duty of loyalty is so that liability for violating it couldn't be abrogated by DGCL 102(b)(7). (DGCL 102(b)(7) can only reduce liability for duty of care violations.)

Hope that helps. I'm glad to elaborate where I can and as best as I can.

Okay, that clears things up a bit.

One thing that's still confusing me is the "duty of oversight." Is that just a specific application of the duty of care?

I also have random jibberish that good faith is a "prerequisite" to the business judgment rule. Can anybody expound on this a bit?

I know this seems super basic, but my professor's lectures either involved absurdly random tangents or talking over our heads with super complicated terminology.

Thanks for the help so far.

[MinEMorris]

Sorry, I edited and added a late note about the duty of oversight. See my previous post.

The duty of care in the MBCA is basically section 8.31. 8.30 gives an ideal standard of conduct, but 8.31 draws the line of liability. 8.31(a)(2)(i) specifically refers to acting in good faith. Honestly, I never studied that portion in depth. I imagine you could find out more through a google search, a secondary source, or even looking at annotated codes on lexis/westlaw.

In Delaware, the duty of care has been fleshed out by case law. This case law has culminated in what is referred to as the business judgment rule, which basically says what the board does is fine unless:
1. The board's action is not in the honest belief that it's in the best interests of the corporation, OR
2. The board's action is not based on an informed investigation, OR
3. involves a conflict of interest.

I think the good faith party you're referring to is (1). This is really a very easy standard to meet. So long as there's a remotely plausible story about how the action is in the best interests of the corporation, courts will usually roll with it.

[Kikero]

I also have random jibberish that good faith is a "prerequisite" to the business judgment rule. Can anybody expound on this a bit?

I think this is what MinEMorris mentioned as the one that is sometimes considered an independent duty. Stone v Ritter and Caremark and those cases. Basically directors are only protected by the BJR if they have up to the point acted in good faith by informing themselves, making sure there is a reporting system in place, etc. The Board can't just go around oblivious to what is going on with the corporation and expect to be protected if they have not made a good faith effort to keep informed and make decisions. Therefore, the business judgment rule only protects directors who satisfy the "prerequisite" of acting in good faith up to that point.

Disclaimer: I'm studying for my Business Associations final currently, so it's possible I'm completely wrong and am going to get a C on the exam or something.

[AVBucks4239]

Sorry, I edited and added a late note about the duty of oversight. See my previous post.

The duty of care in the MBCA is basically section 8.31. 8.30 gives an ideal standard of conduct, but 8.31 draws the line of liability. 8.31(a)(2)(i) specifically refers to acting in good faith. Honestly, I never studied that portion in depth. I imagine you could find out more through a google search, a secondary source, or even looking at annotated codes on lexis/westlaw.

In Delaware, the duty of care has been fleshed out by case law. This case law has culminated in what is referred to as the business judgment rule, which basically says what the board does is fine unless:
1. The board's action is not in the honest belief that it's in the best interests of the corporation, OR
2. The board's action is not based on an informed investigation, OR
3. involves a conflict of interest.

I think the good faith party you're referring to is (1). This is really a very easy standard to meet. So long as there's a remotely plausible story about how the action is in the best interests of the corporation, courts will usually roll with it.

I have that same list regarding the business judgment rule. Does this mean that the duty of loyalty is a "prerequisite" to the BJR like the duty of care/good faith?