Directors' fiduciary duties: increasing focus on good faith and independence.

• Author: Davis, Gardner
• Position: Florida

The corporate board of directors has well-established fiduciary duties to the corporation and its shareholders. Recent cases against directors for breach of fiduciary duty increasingly focus on allegations of failure to act in good faith predicated on inaction and lack of oversight and allegations of lack of independence. This article discusses the changing legal standards and expectations for directors of Florida corporations and provides practical guidance for counsel regarding how to advise directors to reduce the risk of suit.

Basic Fiduciary Duties

Under Florida law, directors oversee the management of the business and affairs of the corporation, (1) and their actions are governed by a mixture of statutory and common law principles. (2) The directors owe a fiduciary duty to the corporation and its shareholders, (3) which is generally expressed in terms of good faith, (4) the duty of care, and the duty of loyalty. The directors' fiduciary duty has been codified in F.S. [section]607.0830(1) (2008):

A director shall discharge his or her duties as a director, including his or her duties as a member of a committee: (a) in good faith; (b) with the care an ordinarily prudent person in a like position would exercise under similar circumstances; and (c) in a manner he or she reasonably believes to be in the best interests of the corporation.

The Florida Supreme Court, in the early case of Orlando Orange Groves Co. v. Hale, 144 So. 674, 677 (Fla. 1932), summarized the directors' fiduciary duty as follows:

While directors of a corporation may not be in the strict sense trustees, it is well established by the decisions that they occupy a quasi fiduciary relation to the corporation and its stockholders. They are required to act in utmost good faith, and in accepting the office they impliedly undertake to give to the enterprise the benefit of their best care and judgment, and to exercise the powers conferred solely in the interests of the corporation.

Every director must work for the benefit of all the shareholders, even when nominated or designated by a particular group of shareholders.

Decisionmaking Process

Boards have traditionally performed a decisionmaking function, such as evaluating and, if appropriate, approving significant business transactions and investments. Directors have a duty to inform themselves, prior to making a business decision, of all material information reasonably available. (5) This does not mean the board must be informed of every fact, but only material facts that are reasonably available. (6) The board is also expected to act "in a deliberate and knowledgeable way in identifying and exploring alternatives." (7)

The Florida Business Corporation Act, F.S. [section]607.0830(2), authorizes directors to rely on information, opinions, and reports provided by corporate officers and employees and legal counsel, public accountant, and other experts, so long as the directors reasonably and in good faith believe them to be reliable and competent. Obtaining reports from management and guidance from outside advisors is a hallmark of a careful decisionmaking process. (8) Of course, no board is obligated to heed the counsel of any of its advisors. (9) One recent case found the directors breached their fiduciary duty by abdicating crucial decisionmaking authority to the outside advisor. (10) In some situations, sole reliance on hired experts and management can taint the process. (11) The directors must exercise their independent business judgment.

The Florida Business Corporation Act, F.S. [section]607.0830(3), authorizes directors to consider the interests of employees, suppliers, and customers and the communities in which the company operates when making business decisions. (12) However, the board is primarily responsible for the economic performance of the corporation and maximization of shareholder value. This so-called "stakeholder" or "other constituencies" statute is best understood as authorizing other factors to be considered in the decisionmaking process rather than creating independent corporate objectives. (13)

The areas of board decisionmaking that currently produce the most litigation, and, therefore, warrant extra caution, include the potential sale of the company or other change of control transaction; (14) the selection, evaluation, and compensation of senior executives; (15) investigation of potential unlawful activity; (16) and situations when the company is experiencing financial difficulties. (17)

There is no preset formula that...