Neighborhood Transformation

Neighborhood Transformation

Avoiding Personal Liability as a Director
Fiduciary Duties
Owed by Nonprofit Board Members
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WHAT IS A "FIDUCIARY DUTY"?:
    Directors owe a legal duty of good faith, full disclosure, fair dealing, and undivided loyalty to the corporation.

    Directors should always put aside their personal self interest and act in the best interest of the corporation. If a director is unable to do that he or she should resign for the board.
CONSEQUENCE OF A BREACH
    A breach typically occurs when a director self deals for his or her own benefit or the benefit of another corporation in which that director has an interest.

    If the corporation suffers damages as a result of the breach of a fiduciary duty the director in question can face personal liability in favor of the corporation, its members or its shareholders
TYPES OF FIDUCIARY DUTIES:
  • Conflict of Interest:

    • This can occur when a director is faced with a vote at a board meeting involving a matter in which the director has a personal interest (either directly or indirectly).  The affected director in such a situation has a potential for divided loyalties.

      • For example, a vote might involve the authorization for a lease, an employment contract, the sale of property, etc., and the director (or her family) has a personal stake in the outcome.  It can also occur when the director has divided loyalties because he or she also serves on the board of the other corporation in the transaction.

    • How to Avoid Personal Liability.  For a director to avoid personal liability when a matter comes before the board in which the director has a conflict of interest the director in question should follow the following procedures and then insist that minutes clearly show that the proper procedures were followed:

      • the minutes should show that the board member disclosed the potential conflict.

      • the minutes should reflect that there was a full discussion about how the proposed deal was in the best interests of the corporation

      • The minutes should show that the director with the conflict abstained from the vote .

      • The bottom line, however, is that the proposed transaction must actually be in the best interest of the corporation and not primarily for the benefit of the director

    • If a director violates his or her fiduciary duty by voting at a board meeting despite the presence of a conflict of interest that director may later be found liable by a court for any damages suffered by the corporation, BUT, the vote itself is otherwise valid despite the director's violation of his or her fiduciary duty.

  • Duty of Loyalty.  A director has a duty to act for the benefit of the corporation. A director's fiduciary duty is one of undivided loyalty to the corporation. That duty encompasses all of the elements of loyalty, care and fair dealing implicit in a fiduciary relationship.

  • The Duty to Act in Good Faith.  Directors must act in the best interests of the corporation and its members or stockholders. More specifically, the Duty to Act in Good Faith prohibits directors from: (1) failing to act in the face of a known duty to act; (2) acting in a manner unrelated to a pursuit of the corporation’s best interest; and (3) maintaining a sustained or systematic failure to provide oversight.

  • Competing with the corporation.  Violates that fundamentals of duty of undivided loyalty.

  • Usurpation of corporate opportunity.
    Directors cannot divert for themselves business opportunities that rightfully belong to the corporation.