Standards of Conduct and Standards of Review

Directors of corporations owe fiduciary duties to the corporation and its residual claimants (i.e. common stockholders). In the corporate context there are two basic fiduciary duties: care and loyalty. The fiduciary duty of care generally requires a director to use the care that a reasonably prudent person in like position would reasonably believe appropriate under the circumstances when managing the corporation for the benefit of the residual claimants. The duty of loyalty generally requires a director to discharge her duties in good faith and with the reasonable belief that her actions are in the best interests of the corporation and the residual claimants.

When a court is asked to judge director actions against the fiduciary duties directors owe to the corporation, the court deploys one of several standards of review depending on the circumstances and the duty being questioned. The following excerpt from In re Trados S'holder Litigation provides a broad overview of how courts approach the question of evaluating director conduct against the appropriate standard of review.