6.2 Sources of Corporate Duties

• Library: Corporations and Partnerships in Virginia (Virginia CLE) (2016 Ed.)

6.2 SOURCES OF CORPORATE DUTIES

The obligation to direct the management of the corporation is placed by statute on the board of directors of a Virginia corporation. ²² Whether a board of directors has properly discharged its responsibilities in a particular situation, however, depends on common law. Liability can be imposed on directors and officers for negligence or disloyalty in connection with corporate acts.

The substance of a business decision made by a corporation's board of directors or its officers will not be scrutinized by a court, provided the acts objected to were performed with due care for what the directors and officers believed to be in the best interests of the corporation and its shareholders. To avoid judicial scrutiny, the acts in question also must not involve conflicts of interest between the corporation and its directors and officers. If no evidence suggests the directors and officers acted disloyally or negligently, a Virginia court will be reluctant to impose liability for honest mistakes of business judgment. ²³ Indeed, a rebuttable presumption exists that directors and officers conduct the business of their corporation with a bona fide regard for its interests and those of its shareholders. ²⁴ If a corporate decision can be attributed to any rational business purpose, courts will refrain from reviewing the decision. ²⁵ This principle of judicial abstention is known as the "business judgment rule." ²⁶ The rule insulates directors and officers from liability under state law with respect to corporate transactions, except those tainted by "gross mismanagement or bad faith" ²⁷ and provides a safe harbor

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for directors' actions or inactions and protects their good-faith business judgments from being second-guessed in court. ²⁸

Common law standards are modified by the Act, which enunciates standards of conduct for directors ²⁹ and director conflicts of interests. ³⁰ These provisions are discussed further in paragraphs 6.302 and 6.403 of this chapter.

However, even though common law standards are modified, they are not completely abrogated by the Act. ³¹

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Notes:

^[22] Va. Code § 13.1-673. This power is made subject to "any limitation set forth in the articles of incorporation or in an agreement authorized under § 13.1-671.1."

^[23] Williams v. Fidelity Loan & Sav. Co., 142 Va. 43, 68, 128 S.E. 615, 623 (1925).

^[24] Giannotti v. Hamway, 239 Va. 14, 21, 387 S.E.2d 725, 731 (1990).

^[25] Penn v. Pemberton & Penn, Inc., 189 Va....