What is a Director’s Duty of Care?

Generally, a corporation’s articles may limit directors’ personal liability for money damages to a corporation or to its shareholders for actions taken or for failure to take action. However, the articles may not eliminate liability for a director’s breach of duties owed to the corporation. For example a corporation’s articles cannot eliminate liability for receiving financial benefits to which the director is not entitled, intentionally inflicting harm on the corporation or its shareholders, unlawful corporate distributions, or an intentionally violating criminal law.

Duty of Care

Every director owes the corporation a duty of care. This means that he or she must manage the corporation to the best of his or her ability, act in good faith, and do what a prudent person would do with regard to his or her own business.

An example of acting in good faith includes diligently obtaining and reviewing financial statements when the corporation is in the process of purchasing a new business or business assets. The directors must review the new business or assets thoroughly before voting to proceed with the purchase or acquisition.

The directors may rely on the assurances of another director, committee, or professional advisor’s that the new business is financially sound. However, in the event that the transaction goes through but the new business was not financially sound, a court may determine that  the directors have breached their duty of care if a prudent director would have made further inquiry than the sole reliance upon another director, a committee, or an advisor’s assurances.  This duty of inquiry is part of the duty of care.

To avoid personal liability, directors guiding a corporation in a corporate transaction should exercise due diligence to avoid being found liable for any corporate losses because of their breach of duty of care.

Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. We have successfully prosecuted and defended various types of business and property claims. Contact us at (310) 277-7747 to see how we can help you with your business law concerns.