Important Things to Know When Serving on a Board of Directors

Serving on the Board of Directors of any corporation can be a great opportunity for both personal and financial growth. As with everything in life, however, in order to receive, one must also give. This article will summarize the responsibilities imposed by the law on directors who serve in the state of Florida. The law to which we will be referring is judicial common law and Florida Statutes. Specifically, we will examine Florida Statutes Sections 607.0801 through 607.0832, which are the sections of the Florida Business Corporation Act that address boards of directors. These sources of obligation are in addition to the articles of incorporation and bylaws specific and unique to each corporation, which often supersede the base standards set by statute. If the directors fulfill their duties, they will be protected from personal liability for negative consequences of their decisions by the business judgment rule. A convenient way to organize the obligations imposed by these sources of law is according to the three broadly defined duties of directors: the Duty of Good Faith, the Duty of Care, and the Duty of Loyalty.

The Duty to Act in Good Faith

Good faith and fair dealing mean what they sound like they mean. This duty imposes more than the default standard of care that we owe to everyone around us. Because of the unique nature of the board of directors, especially considering their relationship to the corporation and the power they wield over the company’s long term viability, they are held to a higher standard. This duty is perhaps best understood in terms of what is not good faith. The Florida Supreme Court examined good faith in the context of the duties of an insurer to an insured. Berges v. Infinity Ins. Co., 896 So. 2d 665, (Fla. 2004). There, the Court found that “good faith” involved exercising care in the handling of the claim, including investigating and disclosing reasonable settlement offers to the insured. In the same way, boards of directors will be expected to act reasonably in investigating consequences of decisions and alternatives before making a final plan. This duty can be understood as being distinct from the other duties because it applies to interactions between the board and the corporation, whereas the other two duties deal with the board’s internal procedures and the board’s interactions with those outside the corporation.

The Duty of Care

The law expects directors to exercise reasonable care in their decision making process. This means that directors must act the way that a reasonably prudent director would act under the same or similar circumstances. While the board is not responsible for day to day operations of the corporation, they are responsible for the strategic planning of the company and must ensure that the corporation’s obligations are being met overall. Therefore, this duty applies to the board’s internal decision making procedures, including the evaluation of sources of information. Furthermore, this duty of care generally requires directors to attend meetings of the board, make informed decisions, exercise independent judgment, monitor the performance of the company, and maintain records of the board meetings. Directors should read and understand the articles of incorporation of the company and the bylaws.

The Duty of Loyalty

Fulfilling the duty of loyalty means that the board must have undivided loyalty to the corporation and make decisions that are in the best interests of the corporation. Note that this obligation does not belong to any one individual within the corporation, but rather the organization itself, as a whole. This duty is most frequently violated when board members vote on decisions where conflicts of interest are present and when directors engage in self-dealing. Keep in mind that the corporation’s articles of incorporation and bylaws trump the statutory guidelines with regard to conflicts of interest. It is highly advisable for a corporation to have clearly written procedures for dealing with conflicts of interest. Transactions that would be self-dealing can be cleansed, according to Florida Statutes Section 607.0832, if (1) the director discloses the conflict to the board and the board votes by a majority in favor of the transaction, (2) the director discloses the conflict to the shareholders and they vote by a majority in favor of the transaction, and (3) the transaction was fair and reasonable to the corporation at the time it was voted on.

The Business Judgment Rule

The common law business judgment rule states that directors who serve on a board for a company cannot be held personally liable for the negative consequences of decisions they make using their discretion as businesspeople. Florida has codified the business judgment rule in Section 607.0831, which states that a director will not be personally liable for monetary damages as a result of something they did as a director unless their conduct falls under one of five stated categories of breach. Those five categories are: violation of a criminal law (unless there was reasonable cause for the director to think that their conduct was lawful or there was no reason to think their conduct was unlawful), uncured self-dealing, unlawful distributions to shareholders, disregard of the best interests of the corporation in a shareholder suit, and bad faith in a shareholder suit.

An example where the business judgment rule would not protect the actions of a director would be when the director makes a unilateral decision to enter into a business transaction from which he will receive a sales commission. Aerospace Accessory Service, Inc. v. Abiseid, 943 So. 2d 866 (Fla. Dist. Ct. App. 2006). In Aerospace Accessory Service, the court ruled that the defendant director/ salesman could not “burrow under the protective blanket” of the business judgment rule because he clearly fell under the self-dealing category of exemptions codified in §607.0831.

Conclusion

It is not difficult to fulfill these duties and obtain this protection as long as each director takes their position seriously. Diligence and commitment are essential because the board of directors must thoughtfully examine the various governing documents and weigh the company’s options in order to best serve the company.