Board directorship brings with it duties, liabilities

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You may be considering serving on the board of directors of a non profit or general business corporation. |ret||ret||tab|

Missouri law states that the property and business of a corporation shall be controlled and managed by a board of directors. |ret||ret||tab|

But you should be aware of the duties and responsibilities of serving as a director and take care to act in a prudent manner to avoid personal liability for your actions.|ret||ret||tab|

Missouri law requires a corporation to have three or more directors unless the articles of incorporation provide for only one or two. The directors are elected by the shareholders for terms of one to three years. |ret||ret||tab|

A meeting of the directors of a newly formed corporation should take place as soon as possible to elect corporate officers. |ret||ret||tab|

Thereafter, regular meetings may be held as prescribed in the bylaws, or actions may be taken by written consent of all directors without the necessity of a meeting. |ret||ret||tab|

A prime duty of a director is that of exercising due care in managing the affairs of the corporation. Failure to do so may result in personal liability for any loss suffered by the corporation. |ret||ret||tab|

The general standard by which the duty of care is measured is that of the care and skill which ordinarily diligent and prudent persons would exercise under similar circumstances. |ret||ret||tab|

As a result, a director should attend meetings, be informed on matters under consideration and vote in accordance with the information gained. |ret||ret||tab|

It is clearly a breach of the duty of care to allow the officers to manage the corporation without oversight from the board. |ret||ret||tab|

A director also owes a duty of loyalty to the corporation. Directors are therefore prohibited from taking corporate opportunities for themselves, and from engaging in self-dealing. |ret||ret||tab|

A corporate opportunity may exist, for example, in purchasing goods from a company with financial trouble that may be sold to existing customers at a great profit. |ret||ret||tab|

A director would be violating the duty of loyalty by directly and individually purchasing the goods and selling them to the corporation's customers, pocketing for himself the profits.|ret||ret||tab|

Nor should a director engage in self-dealing. |ret||ret||tab|

For example, assume a corporation needs to lease trucks for a certain job. A director who owns a company that leases trucks might enter into an agreement with the corporation to provide the trucks needed. |ret||ret||tab|

If the board is made aware of the interest of the director in the agreement, and a majority of the other directors approve the transaction, it will not be voided so long as it is fair. An undisclosed interest coupled by an unfair deal is certainly a voidable transaction.|ret||ret||tab|

Courts are generally reluctant, however, to impose liability upon a board of directors for bad business decisions. The so-called "business judgment rule" states that where a matter is one calling for a business judgment by the directors, and the judgment is exercised fairly and honestly, courts will not interfere. |ret||ret||tab|

In addition to the protection afforded by the business judgment rule, a Missouri corporation may also choose to indemnify directors against conduct that is not knowingly fraudulent or purposefully dishonest. By exercising sound judgment and common sense, a director's tenure may be a rewarding one.|ret||ret||tab|

(Stephen F. Aton is a Springfield attorney practicing in the areas of corporate law and taxation, and estate planning.)[[In-content Ad]]