Director duties and derivative suits

Director and Officer Duties: The Trigger, the Breach, and the Safe Harbor

Corporate directors and officers owe fiduciary duties that turn on how they acted, not merely on whether the corporation’s decision succeeded. Under MBCA § 8.30, a director must discharge duties:

1. In good faith;
2. With the care an ordinarily prudent person in a like position would exercise under similar circumstances; and
3. In a manner the director reasonably believes to be in the best interests of the corporation.

MBCA § 8.42 applies the same core standard to corporate officers, measured against the officer’s assigned position and authority. The officer’s narrower role changes what information and decisions are reasonably expected, but it does not eliminate fiduciary responsibility.

The first near miss is bad outcome versus defective process. A carefully investigated decision may be protected even if it loses money. Conversely, a director or officer may breach the duty of care by ignoring material information, failing to monitor obvious risks, or approving action without a reasonable decision-making process. A court does not ordinarily use hindsight to convert a reasonable business decision into negligence.

The second near miss is care versus bad faith. Conscious disregard of known red flags is more than an unfortunate result. A director who knows that a report omits a serious liquidity problem cannot invoke the report as a shield. Likewise, an officer cannot blindly rely on a subordinate while deliberately avoiding facts that would expose the problem. Good faith requires more than avoiding an obvious bribe; it requires an honest, non-self-serving discharge of the office.

Directors and officers may rely on information, opinions, reports, or statements from competent employees, legal counsel, public accountants, board committees, or other appropriate professionals when they reasonably believe the source is reliable and competent. MBCA § 8.30(c) states this protection for directors, and MBCA § 8.42 contains the corresponding officer rule. Reliance fails when the fiduciary has knowledge making reliance unwarranted. Reliance is therefore not a substitute for judgment: a red flag, an obvious contradiction, or knowledge that the report is incomplete requires further inquiry.

The duty of loyalty addresses the fiduciary’s use of corporate power for personal benefit. A director or officer must not secretly profit from the office, divert corporate assets, misuse confidential information, compete unfairly with the corporation, or place personal interests ahead of the corporation without proper disclosure and authorization.

A director’s conflicting interest transaction is a transaction brought before the corporation for action in which the director knows that the director or a related person has a conflicting financial interest. MBCA § 8.60 supplies that definition. The conflict does not automatically make the transaction void. Under MBCA § 8.61, the transaction receives statutory protection if one of three paths is satisfied:

1. After required disclosure, it is approved in good faith by qualified directors under MBCA § 8.62;
2. After required disclosure, it is approved by shareholders under MBCA § 8.63; or
3. The transaction is fair to the corporation.

A qualified director is a director who lacks a conflicting interest and lacks any familial, financial, professional, employment, or other relationship with the conflicted director that would reasonably be expected to influence the director’s judgment concerning the transaction; the director also must satisfy the statute’s requirements concerning whether the director or a related person is a party to the transaction. Disclosure must reveal the material facts needed for an informed decision. Mere abstention is not the same as disclosure, and approval without the required information does not earn the statutory safe harbor. If no safe-harbor route applies, the conflict is not automatically conclusive, but the fiduciary faces ordinary judicial scrutiny and possible relief.

A corporate opportunity is different from a conflicting-interest transaction. The latter concerns a transaction involving the corporation and the fiduciary or a related person. The former concerns a business prospect that the fiduciary diverts from the corporation. The corporate-opportunity inquiry asks whether the opportunity came through the fiduciary’s corporate position, information, or resources; whether it is closely related to the corporation’s business or an existing or expected corporate interest; and whether taking it creates a conflict with the corporation’s ability or interest in pursuing it.

The fiduciary should disclose the material facts and give the corporation a genuine chance to decide. If the corporation properly rejects the opportunity, the fiduciary may generally take it personally, subject to any agreement, confidentiality duty, or misuse of corporate resources. Disclosure of the material facts and a genuine opportunity for the corporation to reject the opportunity generally permit the fiduciary to take it personally; taking the opportunity without disclosure and corporate rejection may constitute disloyal diversion. Because this chapter concerns corporate fiduciaries, the separate fiduciary-duty rules for general partners and LLC members or managers belong to the sibling chapter.

This is closed-book-you must be able to state the MBCA § 8.30 and § 8.42 requirements, the reliance limit, and the three § 8.61 conflict-transaction paths from memory.

Who Is Suing Whom: Matching the Claim to the Right Enforced

To classify an owner’s lawsuit, begin with the parties and the right being enforced: Who is suing whom, and whose right was violated? A shareholder’s use of the word “direct” or “derivative” does not control. The requested relief and the identity of the injured party do.

A corporation suing its director or officer is asserting the corporation’s own claim. That is a corporate action, not a shareholder derivative action. A shareholder suing the corporation to enforce a personal voting, dividend, inspection, or class-specific right is asserting a direct claim. A shareholder suing a director, officer, or third party to recover for harm suffered by the corporation is bringing a derivative claim, ordinarily with the corporation joined as a nominal defendant and the recovery paid to the corporation.

The most tested near miss is lost share value versus a distinct personal injury. If a director’s misconduct causes the corporation to lose money and the shareholder’s stock correspondingly declines, the injury ordinarily belongs to the corporation. The shareholder’s claim is derivative, even though the shareholder personally feels the economic loss. If the fiduciary instead denies that shareholder a vote, violates a shareholder-specific contractual right, or treats that shareholder differently from similarly situated owners, the injury may be direct.

Dilution requires the same precision. If everyone’s proportional ownership is reduced because the corporation was harmed or because corporate assets were transferred improperly, the claim is generally derivative. If the challenged conduct uniquely strips one shareholder of voting power or a class-specific entitlement, the claim may be direct. The fact separating the two is not simply “shares became worth less”; it is whether the plaintiff suffered a separate injury to an individual right.

A shareholder can also plead both forms when the facts support genuinely different injuries. For example, an improper issuance might injure the corporation by selling shares too cheaply and separately injure one shareholder by eliminating that shareholder’s voting control. The first theory seeks recovery for the corporation; the second seeks personal relief. Once the claim is classified as derivative, apply the derivative-action prerequisites and demand rules already covered in the topic lesson.

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Recurring errors are concrete misclassifications:

• Treating a corporation’s loss from a director’s secret purchase as the shareholder’s direct injury because the stock price fell.

• Calling a shareholder’s suit derivative merely because a director is the defendant when the shareholder’s personal voting right was denied.

• Treating a bad financial result as proof of breach despite an informed, good-faith process.

• Assuming an officer escapes fiduciary duties because the board, rather than the officer, had final approval power.

• Treating abstention from a conflicted vote as adequate disclosure when the material conflict was never presented to the decision makers.

One Worked Item: A Secret Opportunity Belongs in the Corporate Recovery

Greenline Corporation is financially able to purchase a parcel needed for its planned distribution center.

During a board meeting, Director Diaz learns that the seller will accept a favorable price, but Greenline has not yet made an offer.

Diaz secretly buys the parcel personally and later sells it for a large profit.

Shareholder Lee sues Diaz, alleging that Greenline lost the opportunity and requesting that any recovery be paid to Greenline.

Greenline is joined as a nominal defendant.

Which is the best characterization of Lee’s action?

Three Final Fact Patterns: Separate Care From Claim Ownership

High-Yield Points - ⚡ Biggest Takeaways

Apply MBCA §§ 8.30 and 8.42 by testing good faith, prudent care, and reasonable belief in corporate interests. Reliance fails when known red flags make the information source unreliable. A shareholder enforces corporate harm derivatively; a distinct personal-right injury supports a direct claim.