I. Duties of Director to Corporation and Shareholders

• Library: South Carolina Corporate Practice Manual (SCBar) (2005 Ed.)

I. Duties of Director to Corporation and Shareholders

1. Common Law Fiduciary Duties of Loyalty and Care

South Carolina courts have followed the general common law rules in the United States and have held that officers and directors are fiduciaries, owing duties of loyal and due care to the corporation. In addition, the South Carolina Supreme Court has adopted the "minority" rule, now dominant⁵⁴ that these duties are owed to the shareholders as well.⁵⁵

The key requirements of the duty of loyalty are full disclosure and complete fairness.⁵⁶ The standard of care applied by the Supreme Court has been variously phrased as "such care as an ordinarily prudent man takes with his own affairs"⁵⁷ or "the degree of care which ordinarily prudent and diligent men would exercise under similar circumstances."⁵⁸

2. Statutory Standard

The 1988 South Carolina Business Corporation Act, like its predecessors, contains a specific statutory formulation of directors' and officers' fiduciary duties. The statutory statement of directors' fiduciary duties reads as follows:

§ 33-8-300. General standards for directors.

(a) A director shall discharge his duties as a director, including his duties as a member of a committee:

(1) in good faith;
(2) with the care an ordinarily prudent person in alike position would exercise under similar circumstances; and
(3) in a manner he reasonably believes to be in the best interests of the corporation and its shareholders.

The same formula is used for the standard of conduct for officers who have discretionary authority.⁵⁹

a. General Effect of Statutory Formula

This statutory formula clarifies some things but leaves many questions open for judicial resolution, with courts often drawing upon the common law development of fiduciary duties. The statutory language makes it clear that directors and officers have fiduciary duties not only to the corporation, but also to the shareholders, in accord with South Carolina common law.⁶⁰ The Act's standard continues the common-law dichotomy between the duty of loyalty⁶¹ and the duty of due care.⁶² Both duties are subject to a requirement that the director or officer act in good faith.⁶³ One seeking to prove that an officer or director violated his fiduciary duties because he did not act in good faith bears the burden of proving bad faith,⁶⁴ although frequently bad faith is obvious and the burden of proof, inconsequential.⁶⁵

b. Duty of Loyalty

The duty of loyalty - classic fiduciary duty in the narrow sense - requires that the director or officer deal fairly with the corporation and its shareholders, placing their interests above his own. Utter candor is required.⁶⁶ Courts often condemn competition with the corporation, usurpation of a corporate opportunity, transactions with the corporation and other conflicts of interest, insider trading, oppression of minority shareholders, and sale or purchase of control.⁶⁷

c. Duty of Care - Business Judgment Rule

The duty of care requires that a director (or officer) act carefully; insuring a beneficial result is not required.⁶⁸ The focus is upon the process by which directors make the decision, not upon the outcome. This standard is often called the business judgment rule: if directors have carefully exercised their business judgment, the wisdom or soundness of their decision will not be second guessed. It is reminiscent of the standard for negligence, that a person who has met the applicable standard of care will not be held liable even though his actions cause injury to another.⁶⁹ The 1988 Business Corporation Act merely requires "the care an ordinarily prudent person in a like position would exercise under similar circumstances."⁷⁰ Henn and Alexander describe the business judgment rule as follows:

If in the course of management, directors arrive at a decision, within the corporation's powers (intra vires) and their authority, for which there is a reasonable basis, and they act in good faith, as the result of their independent discretion and judgment, and uninfluenced by any consideration other than what they honestly believe to be the best interests of the corporation, a court will not interfere with internal management and substitute its judgment for that of the directors to enjoin or set aside the transaction or to surcharge the directors for any resulting loss.⁷¹

They proceed to summarize the three requirements of the business judgment rule: "Business judgment thus, by definition, presupposes an honest, unbiased judgment (compliance with fiduciary duty) reasonably exercised (due care), and compliance with other applicable requirements."...