Duties and Requirements of Officers and Directors of MN Corporations

Oversight of a Corporation’s Officers and Directors

Minnesota statutes provide the necessary control and oversight by setting the standards of conduct for Officers and Directors. Under the Minnesota Business Corporation Act, an Officer or Director must discharge the duties of the position in good faith, in a manner the Officer or Director reasonably believes to be in the best interests of the corporation, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances. The standard of conduct for directors is set by Minn. Stat. § 302A.251, subd. 1, and the parallel standard for officers is set by Minn. Stat. § 302A.361, subd. 1.

The Law Establishes the Duties of Officers and Directors

These requirements imposed on Officers and Directors are commonly referred to as the Duty of Loyalty and the Duty of Care.

An Officer or Director who discharges these duties in the required manner is, by statute, not liable by reason of being or having been an Officer or Director of the corporation. Minn. Stat. § 302A.251, subd. 1; Minn. Stat. § 302A.361, subd. 1. Liability is not automatic, and neither is protection from it. A Director who acts in good faith may rely on information, reports, and opinions prepared by the corporation’s officers and employees, by its lawyers and accountants, and by board committees the Director reasonably believes to be competent, but that reliance is not protected where the Director has knowledge that makes the reliance unwarranted. Minn. Stat. § 302A.251, subd. 2.

A corporation may also limit a Director’s personal liability for money damages in its articles of incorporation, but that limitation can never eliminate liability for a breach of the duty of loyalty, for acts not in good faith or involving intentional misconduct or a knowing violation of law, or for a transaction from which the Director derived an improper personal benefit. Minn. Stat. § 302A.251, subd. 4. Indemnification of a Director is governed by a separate statute and is mandatory only when the Director acted in good faith and received no improper personal benefit, among other statutory conditions. Minn. Stat. § 302A.521, subd. 2.

The Duty of Loyalty

The Duty of Loyalty requires Officers and Directors to perform their corporate duties in good faith and in a manner they reasonably believe to be in the best interests of the corporation, rather than placing personal interests ahead of the corporation’s. Minn. Stat. § 302A.251, subd. 1 (directors); Minn. Stat. § 302A.361, subd. 1 (officers). By statute, good faith means honesty in fact in the conduct of the act or transaction concerned. Minn. Stat. § 302A.011, subd. 13.

The Duty of Loyalty also requires Officers and Directors to disclose certain information. A Director who has a material financial interest in a contract or transaction with the corporation must disclose that interest. Under Minnesota’s conflict-of-interest statute, such a transaction is not void or voidable solely because of the Director’s interest if any of the following conditions is met: the person asserting the transaction’s validity proves it was fair and reasonable to the corporation at the time it was authorized; the material facts and the Director’s interest are fully disclosed to or known by the shareholders and the transaction is approved in good faith by the required disinterested-share vote; the material facts and the interest are fully disclosed to or known by the board or a committee and the transaction is authorized, approved, or ratified in good faith by a majority of the directors or committee members currently holding office, with the interested Director neither counted toward a quorum nor permitted to vote; or the transaction is a distribution, merger, or exchange governed by sections 302A.551 and 302A.601. Minn. Stat. § 302A.255, subd. 1. This conflict-of-interest provision governs Directors. Minn. Stat. § 302A.255, subd. 1. An Officer’s comparable obligation arises from the officer’s duty of loyalty and the statutory standard of conduct for officers. Minn. Stat. § 302A.361.

In a closely held corporation, the disclosure duties run further. By statute, a court asked to order equitable relief, dissolution, or a buy-out must consider the duty that all shareholders in a closely held corporation owe one another to act in an honest, fair, and reasonable manner in the operation of the corporation, along with the reasonable expectations of the shareholders. Minn. Stat. § 302A.751, subd. 3a. It is well established that shareholders in a closely held corporation owe one another a fiduciary duty. Berreman v. West Publishing Co., 615 N.W.2d 362, 367 (Minn. Ct. App. 2000), review denied (Minn. Sept. 26, 2000). Minnesota courts have likewise concluded that those fiduciary duties include the duty to disclose material information about the corporation. Berreman v. West Publishing Co., 615 N.W.2d 362, 371 (Minn. Ct. App. 2000), review denied (Minn. Sept. 26, 2000).

Breaches of the duty of loyalty often involve the concealment or nondisclosure of material information.

The Duty of Care

Officers and Directors are not to put their own interests before those of the corporation. The Duty of Care is the third component of the statutory standard of conduct: it requires Officers and Directors to act with the care an ordinarily prudent person in a like position would exercise under similar circumstances. Minn. Stat. § 302A.251, subd. 1; Minn. Stat. § 302A.361, subd. 1. This is a standard of diligence and process, separate from the requirements to act in good faith and in a manner reasonably believed to be in the corporation’s best interests.

Officers and Directors will make mistakes, but if they act in good faith and with the care of an ordinarily prudent person, in a manner they reasonably believe to be in the best interest of the corporation, they will not be held liable for those mistakes.

The Duty of Care does not require that an Officer’s or Director’s judgment turn out to be sound. Mistakes are a cost of doing business, and honest mistakes made in good faith are permissible. Self-motivated actions and self-dealing are not: a corporation’s articles cannot shield a Director from liability for a breach of the duty of loyalty or for a transaction yielding an improper personal benefit. Minn. Stat. § 302A.251, subds. 1, 4.

Courts are reluctant to second-guess the good-faith business judgments of a corporation’s Officers and Directors. As the Minnesota Supreme Court has explained, courts are ill-equipped to judge the wisdom of business ventures and have been reticent to replace a well-meaning decision by a corporate board. Janssen v. Best & Flanagan, 662 N.W.2d 876, 882 (Minn. 2003). This judicial deference, known as the business judgment rule, still requires that Officers and Directors act with the intention of satisfying the goals and best interests of the corporation.