Portions of this posting have been excerpted from Corporate Counsel (http://www.law.com/corporatecounsel/PubArticleFriendlyCC.jsp?id=1202608206884).

A director of a corporation owes certain fiduciary duties to the corporation and its stockholders.  The duties include a duty of loyalty and a duty of care.  A director must perform his or her duties as a director in good faith, in a manner he or she reasonably believes to be in the best interests of the corporation, and with the care that an ordinarily prudent person in a like position would use under similar circumstances.

In an original article from Corporate Counsel titled “How to Define ‘Bad Faith’ for a Board,” the author acknowledges that a practical definition of “bad faith” conduct can be elusive.  He references common notions of bad faith – failing to act in the face of a known duty to act, demonstrating a “conscious disregard” of the duties to be reasonably informed of the business and its risks, and failing to exercise reasonable oversight – and addresses some of the actions (or in-actions) that actually reach the level of “bad faith.”

As discussed and reviewed in the article, a series of unrelated Delaware and federal decisions, all released within the last several months, shed light on the types of conduct that rise to the level of bad faith.  In general, bad faith conduct was found where (1) a board of directors acted with a purpose other than pursuing shareholder interests by seeking the best price for the sale of the business; (2) a board of directors abandoned the special committee it had initially formed to investigate the cause and effect of corporate accounting errors, failed to monitor internal controls despite an awareness of accounting errors, and failed to act to prevent further problems; and (3) a board of directors took no action to remove a corporation’s executive director even though the board knew the executive director was not sufficiently performing her job, took formal public action to close the business (contrary to the advice of bankruptcy counsel who had told them that such action would harm the value and viability of the business), chose not to seek bids from firms that could “turn around” the business, and did not create a “due diligence book” for potential purchasers of the business.

IP & Business Law Counseling, LLC can help your company’s managers or directors understand and maintain their fiduciary duties, and can assist your company in implementing corporate governance and compliance programs.