Introduction to Fiduciary Duties

Officer and directors owe a fiduciary duty to the shareholders and to the corporation. A fiduciary is a person that owes a fiduciary duty to another. Fiduciary duty is just a fancy way of saying a fiduciary has to look out for the best interests of the other person. In Delaware, these duties are owed (i) by officers and directors (ii) to the corporation and its shareholders. The duties owed are the duty of care and the duty of loyalty. 

The duty of care requires directors and officers to “exercise an informed business judgment” when dealing with the shareholders’ interests. Note that the rule says, "informed" not "correct". Boards can make bad decisions as long as they do so in good faith and while well informed. If the directors want to shift the company's focus to teleportation (or Facebook wants to shift to the Metaverse), courts won't stop them as long as the board was informed and acting in good faith. If you're informed, then you've meet the duty of care's requirements even if your decision is dumb. The duty of care is limited to the decisionmaking process, it doesn't look to the results of that process.

The duty of loyalty is closer to what you might expect when you hear about fiduciary duties. It prohibits directors and officers from acting against the interests of the corporation’s shareholders. For example, in Dweck v. Nasser the CEO allegedly set up a competitor in the company's office space, using its resources, employees and goodwill to destroy it from the inside. In Personal Touch Holding Corp. v. Glaubach, the president of the company knew his company was interested in buying a building, so he bought it first and sold it to the company at an inflated price. These are easy duty of loyalty cases.

But what if the CEO withholds information about the side payment he'll get if a merger goes through? Is that disloyal? Even if the merger is a good deal? What if the directors of an airplane manufacturer see their planes repeatedly falling from the sky and do nothing? Is that disloyal? Or just negligent? Should it matter? In this chapter we'll study these more difficult cases and the doctrines developed around them.

We'll also look at the protections directors and officers have around their decisions. This includes a deferential standard of review, the ability to opt-out of certain duties, the ability to rely on others, insurance and indemnification. Not to spoil the plot, but directors are rarely personally liable.