A board of directors of a corporation is the governing body of the corporation that helps facilitate the high-level direction and advances corporate objectives. In addition to those responsibilities, a director of a corporation also has fiduciary duties. First, a director must carry out their duties in good faith in a manner that the director reasonably believes to be in the best interest of the corporation and with the care of an ordinarily prudent person. Minn. Stat. § 302A.251.
In carrying out the duty of good faith, the Minnesota Business Corporation Act states that a director must also consider the interests of the corporation’s employees, customers, suppliers, creditors, the economy, long- and short-term interest of the corporation, and its shareholders. Minn. Stat. § 302A.251(5). Any data that is presented to the directors can be relied on by the directors when determining what the best course of action is for the corporation in any of its endeavors. Minn. Stat. § 302A.251(2).
Duty of Care
In addition to good faith, when a director is carrying out his or her duties, a director has to fulfill the duty of loyalty and the duty of care. Minn. Stat. §302A.251. The duty of care means that the director must make any decisions about the corporation with sufficient information. The business judgment rule is applied to the decisions when there is an alleged breach of the duty of care. Janssen v. Best & Flanagan, 662 N.W.2d 876 (Minn. 2003). The business judgment rule means that Minnesota courts will defer to a director’s business judgment when the director’s conduct is analyzed. Id at 882. More specifically, the Minnesota Supreme Court has said, “As long as the disinterested director made an informed business decision in good faith, without an abuse of discretion, he or she will not be liable for corporate losses resulting from his or her decision.” Id.
Duty of Loyalty
The next duty is the duty of loyalty. This requires directors to act in an honest manner and that the director believes is in the corporation’s best interest instead of acting in the director’s personal best interest or the interests of a third party. Minn. Stat. §302A.361. In acting in loyalty to the corporation, a director is prohibited from leveraging a corporation’s assets to create monetary gain for himself or a member of the director’s family. Stern v. Lucy Webb Hayes National Training School, 367 F. Supp. 536 (DDC 1973).
The Minnesota Business Corporation Act has a process to determine if any transaction between a director and a corporation is a conflict of interest. Minn. Stat. §302A.255. To ensure that any transaction between a corporation and a director is fair and reasonable to the corporation, the transaction must be approved by the holders of at least two-thirds of the voting power of the shares, or the unanimous affirmative vote of the holders of all outstanding shares, whether or not entitled to vote. Minn. Stat. § 302A.255. No matter how the transaction takes place or is approved, all material facts surrounding the transaction must be disclosed to the corporation prior to its approval. Id. If no facts or information are given to the corporation prior to completion of the transaction, then anyone who asserts that the transaction was fair and reasonable must prove that the transaction was indeed fair and reasonable. Minn. Stat. § 302A.255(1). Much conflict between the shareholders can be avoided if all of the pertinent information is given to the corporation prior to completion of the transaction.
Another way that a director can violate their duty of loyalty is to personally take advantage of a business opportunity that was originally awarded to the corporation; in other words, a misappropriation of the corporate opportunity. If a director is found to have breached any of his or her fiduciary duties, they can be held liable. Although a corporation’s bylaws may limit a director’s liability exposure, liability of a director may not be limited for a breach of the director’s duty of loyalty, for acts or omissions not in good faith or involving intentional misconduct or in knowing violation of the law, for illegal distributions under Minnesota Statute § 302A.559, transactions from which the director derived an improper personal benefit, liability under Minnesota Statute § 80A.76, or any act or omission occurring prior to the date the provision eliminating liability for the directors becomes effective.