The Duties You Owe

When you run or manage a company you have certain duties. You owe a duty to the others involved as well as a duty to the company itself. At its core these duties require you to act with ‘due care.’ Courts have held this means the degree of care that an ordinarily prudent person in a like position would exercise under the same circumstances.

So does ‘due care’ mean running the company as your personal piggy bank without regard to the interests of other shareholders? Of course not.

But is due care making decisions that benefit the company instead of the shareholders? That is a closer case. The answer is found in the old attorney stock answer: ‘It depends.’

Courts reviewing such cases will look at the facts and circumstances of each situation. This is as it should be. You want an independent review of each case instead of a hard and fast rule that may not accurately deal with the facts of each situation.

Courts apply the business judgment rule when considering breaches of the duty of care. That is, courts presume that the business decision was proper, regardless of the result, and made in good faith. This presumption, however, can be rebutted (or overcome) if it can be shown that the decision was tainted by fraud or involved a conflict of interest.

The business judgment rule allows businesses to take risks without holding the officers and directors liable. But if you exceed the rule by grossly and/or improperly exceeding your duty of care you can be held responsible.

So always remember you owe a duty of care. If you act with honesty and integrity there will never be an issue.

Original publish date: July 16, 2012