DUTY OF CARE

A corporate director has the duty to act in good faith in pursuit of the company’s best interests and to use the care that an ordinarily prudent person in a like position would use under similar circumstances. The Model Business Corporation Act implies that corporate officers have an even higher duty of care because they intimately are familiar with and knowledgeable about the corporation’s activities and have better access to corporate information than directors have. Most jurisdictions recognize that high-ranking corporate officers have a fiduciary relationship with the corporation.

Duty of Care

Many states have now enacted statutes that protect directors from personal liability under certain circumstances, particularly where the director is subject to a claim for breach of the duty of care. For the most part, these liability shield statutes apply exclusively to directors. There are notable exceptions. For example, Nevada affords corporate officers the same liability protections as those that are authorized for corporate directors. In states that allow a corporation to decide the scope of liability protection for officers and directors, the corporation’s by-laws must be consulted to determine whether the officer is shielded from personal liability and the extent of any protection afforded. Of course, many corporate officers also act as corporate directors. The facts and circumstances surrounding the claim for breach of the duty of care can also dictate whether the officer/director is shielded from liability.

A subset of the duty of care is the obligation of reasonable inquiry. While directors generally may rely in good faith on information provided by officers or employees of the company who are competent to provide such information, officers are not allowed to do so. Officers are presumed to have knowledge about corporate matters. Thus, an officer’s reliance on information provided by other officers or employees may be misplaced and may constitute a breach of the duty of care. Generally, officers may rely only on the information and reports provided by legal counsel or other expert professionals such as certified public accountants and auditors.

Sarbanes-Oxley

Officers of public companies that are required to report pursuant to federal securities laws are held personally responsible for the information contained in those reports under the Sarbanes-Oxley Act of 2002. Reliance on information provided by others can be problematic. Officers must personally certify that information contained in the reports accurately reflects the company’s financial condition during the reporting period. Stiffer administrative and criminal penalties are now available for securities fraud violations.

Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.