Business Law Class Notes

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LIABILITY OF DIRECTORS

A director plays a vital role in a corporate organization. They manage the business, design business policies and select the officers. Liability of the directors is a crucial aspect where a director is expected to be honest, vigilant and protect the shareholders trust in him. Shareholders own the corporation and elect the board of directors whose approval is required for major corporate actions. Liability comes into picture when directors or officers tend to cause financial harm to the corporation, commit a crime or try to breach their duty of care to the corporation. The directors often forget that they are elected or appointed to the position of the director by the shareholders based on their qualifications and with the responsibility and trust to protect the shareholders interest and maximize their gain. However, they start placing their own interest in front of the interest of the shareholders and the company. Hence the integrity and loyalty of the directors is questioned on continues basis in the business world. Directors are found to be liable when they intentionally or negligently cause harm to the third parties. A couple of times they fraudulently induce the association to breach the contract, terminate employees on false grounds or defame them. Section 21.401 of Texas code, does provide the board of directors of Texas corporations with freedom to manage and steer the company as long as the director do not abuse that freedom and power.

Duty of Care:
In the Duty of Care, the directors owe a fiduciary duty to the company, shareholders, clients and third party. A director is held liable under the following circumstances: * If he does not work in faith and interest of the company, shareholders and client. * Breaching the duty to monitor and supervise the company. * Laxity in monitoring company’s activities, business or activities of the management. * Failure to stop wrongdoing activities of the management or directors of the company. * Failure to take action or prevent the misconduct results in hurting shareholders and clients, which should be avoided. * Even if the director’s are not actively involved or know about a misconduct they are yet held liable to shareholders and clients ,because they trust the directors and expect them to be monitoring the company’s activities protecting the assets of the company. * If he/she makes a decision on a subject matter that he/she has a financial or other interest; therefore, the director should make an informed business judgment decision after considering and studying all aspects and for the betterment of the company and all involved. * If he/she is grossly negligent in company business activities, subject matter or decision making process. * The director is also liable for failing to exercise good business judgment and making good faith attempts to fulfill his/her fiduciary duties of acquiring sufficient knowledge and learning before making any decisions for the interest and betterment of the company, shareholders and clients.

There have been several instances where the directors have violated their rights which resulted in disasters and have affected the investors. Let us look into a couple of cases that manifest the directors having breached the duty of care and loyalty.

Case 1: Perlman v. Feldman
ACT OF BREACHING FIDUCIARY DUTY:
Incident:
This is a derivative action brought by minority stockholders of Newport Steel Corporation to compel accounting for, and restitution of allegedly illegal gains which accrued to defendants as a result of the sale in August, 1950, of their controlling interest in the corporation. Feldman was the president, chairman of the board, and majority shareholder of Newport Steel. Newport had operated under the benefit of the “Feldman Plan”—which required purchasers of steel to advance the price of the steel before delivery (essentially an interest free loan). He sold his...
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