6.3 The Duty of Care

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

6.3 THE DUTY OF CARE

6.301 Case Law. The duty of care that directors and officers must satisfy under Virginia case law is less rigorous than the tort law standard for negligence. The standard of care owed by directors and officers to the corporation and its shareholders is the degree of care and prudence that business persons exercise in their own affairs. ³² The Supreme Court of Virginia has held directors and officers liable for a lack of due care only in cases involving financial corporations, such as banks and investment companies, where the directors failed to exercise any supervision over corporate management. ³³ The standard of due care in Virginia is likely higher for directors and officers of financial corporations than it is for directors and officers of other types of corporations. Outside directors, moreover, may be subject to a less demanding standard of due care than that which applies to directors who are also officers of the corporation. Directors who double as officers should be more familiar with corporate affairs. ³⁴ The distinction between standards for inside and outside directors is clearest in the disclosure requirements for federal securities law. ³⁵ Nevertheless, outside

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directors must exercise the same degree of diligence and attentiveness to the affairs of their corporations as inside directors, which means, at a minimum, that all directors should require regular meetings, attend the meetings, ask probing questions to satisfy themselves of the accuracy of information reported and the propriety of the proposed action, and insist upon obtaining advice from experts or independent sources where appropriate.

6.302 The Virginia Statute. Section 13.1-690(A) of the Virginia Code provides that "[a] director shall discharge his duties as a director, including his duties as a member of a committee, in accordance with his good faith business judgment of the best interests of the corporation." A director may rely on information and opinions of corporate officers and employees, professional experts, and board committees, provided the director believes in good faith that the persons relied on are competent. ³⁶ These standards apply both to any action taken and failure to take any action. ³⁷ A person alleging a violation of these standards has the burden of proving the violation. ³⁸

Section 13.1-690 changes common law standards but does not abrogate them. ³⁹ At least one Virginia case recognized that "the statutory standard overlaps, but does not repeal or codify, the common law business judgment rule and the related business judgment doctrine." ⁴⁰ For example, the legislature intentionally omitted the term "reasonable" from the statutory standard of conduct. Directors of Virginia corporations are governed by a standard that looks to the subjective good faith of the director and eliminates a determination of negligence or gross negligence. ⁴¹ The statutory standard does not call for a comparison of the director's conduct with that of a prudent or reasonable person acting under similar circumstances, as does the comparable provision in the Delaware General Corporation Law. ⁴²

In WLR Foods, Inc. v. Tyson Foods, Inc., ⁴³ the Fourth Circuit Court of Appeals confirmed that the Virginia standard of director conduct is a processoriented

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one, not a substantive one as set forth in the Model Business Corporation Act and Delaware law. Good faith is measured by the directors' use of an informed decision-making process and the procedural soundness of the decision-making process and not by a substantive evaluation of the directors' conduct or by the rationality of the decision made. The issue of the standard for judging the propriety of director conduct arose in the context of a discovery request by Tyson for the substance of the advice given to WLR's directors. Both the magistrate judge and the district court judge denied the discovery request, ruling that the substance of the...