Entrepreneurs are used to juggling many roles on their way to building a great company –you’re a founder, employee, director and officer. When you’re wearing the director “hat” for a private Delaware corporation, make sure to be mindful of your fiduciary duties to limit potential personal liability. This is a complex area of the law, but here are some of the basics.
Directors have fiduciary duties of loyalty and care to the company and its stockholders
- Duty of loyalty. You must put the interests of the company and its stockholders over your own personal interests in making decisions for the Company and evaluating opportunities. This includes not taking opportunities that arise for yourself before offering them to the company, and not divulging or using company confidential information for personal gain.
- Duty of care. You must exercise care in making decisions as a director, based on adequate information and a good faith belief that your decisions are in the best interest of the company and its stockholders
These duties also extend to creditors if a company is insolvent or in the “zone of insolvency” – this shift of duties is outside the scope of this article.
Exercising fiduciary duties protects you and your fellow directors
If you fulfill these fiduciary duties in a transaction in which you don’t have a material personal interest, a Delaware court will generally defer to your business judgment, presuming that the board decision was made on an informed basis, in good faith and in the honest belief that it was in the company’s best interests.
A plaintiff could rebut that presumption, but a court generally will not second guess a director’s business judgment and find you personally liable for a bad decision.
Steps you can take to fulfill your fiduciary duties
- Do your diligence – diligence is key when evaluating significant deals, contracts, new hires, investors and business partners (see below about engaging experts)
- Hold regular board meetings – the company should have regularly scheduled board meetings (and special meetings as needed) at which management and advisors provide information regarding the company’s business, and other relevant inputs for decisions facing the board. This is particularly important if you have any non-employee directors on the board, who are not as close to the company’s operations
- Respect the process – conduct a thorough and thoughtful board decision-making process for significant transactions
- Draft clear minutes – while board meeting minutes often don’t include the nitty gritty of all board discussions, a description that demonstrates the extent of the information presented to the board and the breadth of the board’s analysis and discussion is essential for the record
- Disclose conflicts – if you have a conflict of interest in a potential key transaction with the company, you must disclose it to the board. The board, with counsel, would then determine how to proceed – you may recuse yourself from the vote or the board could set up a disinterested committee to review and approve the transaction
- Engage experts – retain outside counsel and other advisors to advise the company on financing transactions, acquisitions, strategic alternatives and corporate governance