If you serve on a corporation’s board of directors, your role carries more than strategy: as a director you owe the corporation fiduciary duties. Minn. Stat. § 302A.251, subd. 1. You must discharge the duties of your position in good faith, in a manner you reasonably believe 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. Minn. Stat. § 302A.251, subd. 1.

When you weigh what the best interests of the corporation are, you are permitted, but not required, to consider the interests of the corporation’s employees, customers, suppliers, and creditors, the economy of the state and nation, community and societal considerations, and the long-term as well as short-term interests of the corporation and its shareholders, including the possibility that those interests may be best served by the corporation’s continued independence. This is a permissive constituency provision, not a command: it is distinct from the mandatory good-faith standard of conduct in subdivision 1. Minn. Stat. § 302A.251, subd. 5.

You are entitled to rely on information, opinions, reports, or statements, including financial data, but only when a trusted source prepared or presented it: officers or employees of the corporation whom you reasonably believe to be reliable and competent; counsel, public accountants, or other persons on matters within their professional or expert competence; or a committee of the board on which you do not serve and that you reasonably believe merits confidence. That protection does not apply if you have knowledge about the matter that makes the reliance unwarranted. Minn. Stat. § 302A.251, subd. 2.

Duty of Care

When you carry out your duties as a director, you must satisfy two fiduciary duties: the duty of care and the duty of loyalty. The duty of care is set by the standard of conduct: you must act with the care an ordinarily prudent person in a like position would exercise under similar circumstances, which means making decisions about the corporation on an informed basis, with adequate information. Minn. Stat. § 302A.251, subd. 1.

When a court reviews an alleged breach of the duty of care, it applies the business judgment rule, which grants a degree of deference to the decisions of corporate directors and operates as a presumption protecting conduct by directors that can be attributed to any rational business purpose. Janssen v. Best & Flanagan, 662 N.W.2d 876, 882 (Minn. 2003). As the Minnesota Supreme Court has explained, under the business judgment rule, “as long as the disinterested director(s) 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. In practice, four conditions earn you that protection: the decision was disinterested, informed, made in good faith, and free of any abuse of discretion.

The Court gave two reasons for this deference. First, protecting directors’ reasonable risks is positive for the economy overall, because those risks let businesses attract risk-averse managers, adapt to changing markets, and capitalize on emerging trends. Second, courts are ill-equipped to judge the wisdom of business ventures and have been reticent to replace a well-meaning board decision with their own. Janssen, 662 N.W.2d at 882.

Presence at a board meeting carries its own risk. If the board approves an action while you are present, the law presumes you assented to it, so staying silent is not protection. You avoid that presumption only if you object at the beginning of the meeting that it was not lawfully called or convened and then do not participate, vote against the action at the meeting, or are prohibited from voting on the action under Minn. Stat. § 302A.255. Minn. Stat. § 302A.251, subd. 3.

Duty of Loyalty

The second duty is the duty of loyalty. It requires you to discharge your duties in good faith and in a manner you reasonably believe to be in the best interests of the corporation, rather than to serve your own personal interest or the interest of a third party. Minn. Stat. § 302A.251, subd. 1. In Minnesota the duty is reinforced by the liability carve-out that bars the articles from eliminating a director’s liability for any breach of the duty of loyalty. Minn. Stat. § 302A.251, subd. 4.

Acting loyally does not mean you can never do business with the corporation. Under the duty of loyalty, you may not cause the corporation to enter a transaction in which you have a personal financial interest without fully disclosing that conflict to the board and establishing that the transaction is entirely fair to the corporation. If you have a conflicting interest, you should disclose it and refrain from voting on or influencing the decision. Directors are not absolutely barred from such transactions, but self-dealing is subjected to the closest scrutiny. Stern v. Lucy Webb Hayes National Training School for Deaconesses & Missionaries, 381 F. Supp. 1003 (D.D.C. 1974).

The Minnesota Business Corporation Act sets out a procedure for transactions in which a director has a conflict of interest. Minn. Stat. § 302A.255. A contract or transaction between the corporation and one of its directors, or an organization in which a director has a material financial interest, is not void or voidable because of the conflict if any one of the following conditions is met:

  • Fair and reasonable. The transaction was fair and reasonable to the corporation when it was authorized, approved, or ratified, and the person asserting its validity bears the burden of proving that fairness.
  • Disinterested-shareholder approval. After full disclosure, the transaction is approved in good faith by the holders of two-thirds of the voting power of the shares entitled to vote that are owned by persons other than the interested director, or by the unanimous affirmative vote of the holders of all outstanding shares, whether or not entitled to vote.
  • Disinterested-director approval. After full disclosure, a majority of the directors currently holding office approve it in good faith, with the interested director excluded from the quorum count and from the vote.

Minn. Stat. § 302A.255, subd. 1. Fairness and approval are alternative safe harbors, not a single mandatory requirement, and the two-thirds threshold counts only shares owned by disinterested holders. Disclosure of the material facts and the director’s interest is required only for the shareholder- and board-approval routes; under the fairness route no disclosure is required, though facts already known to the shareholders or the board also satisfy the requirement.

You are treated as having a material financial interest not only in your own dealings but in any organization in which your spouse, parents, children and their spouses, siblings and their spouses, or your spouse’s siblings hold a material financial interest, and that is what triggers the conflict-of-interest procedure. A resolution fixing director compensation is carved out: it is not automatically void or voidable despite your participation. Minn. Stat. § 302A.255, subd. 2.

Another way to breach the duty of loyalty is to take for yourself a business opportunity that properly belongs to the corporation, a misappropriation of a corporate opportunity. See Miller v. Miller, 301 Minn. 207, 222 N.W.2d 71 (1974). A business opportunity is a corporate opportunity when it is of sufficient importance and so closely related to the existing or prospective activity of the corporation as to warrant judicial sanctions against your personal acquisition of it. Id. Courts then weigh fact-specific factors: your role in the management and control of the corporation; whether the opportunity was presented to you in an official or an individual capacity; whether you disclosed it to the board or shareholders beforehand and how they responded; whether you used corporate facilities, assets, or personnel to acquire it; and whether your acquisition harmed or benefited the corporation. Id. Prior disclosure to the board can defeat liability.

Limiting a Director’s Liability

If you breach a fiduciary duty, you can be held personally liable to the corporation or its shareholders for monetary damages. Minn. Stat. § 302A.251, subd. 4. A corporation’s articles of incorporation, not its bylaws, may eliminate or limit a director’s personal liability to the corporation or its shareholders for monetary damages for breach of fiduciary duty. Minn. Stat. § 302A.251, subd. 4.

Even with such a provision in the articles, five categories of liability can never be eliminated or limited:

  • a breach of the director’s duty of loyalty to the corporation or its shareholders;
  • acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law;
  • liability under Minn. Stat. § 302A.559 (illegal distributions) or Minn. Stat. § 80A.76 (the Minnesota Securities Act);
  • any transaction from which the director derived an improper personal benefit; and
  • any act or omission occurring before the liability-limiting provision in the articles becomes effective.

Minn. Stat. § 302A.251, subd. 4.

Because the articles cannot shield you from liability for an illegal distribution under Minn. Stat. § 302A.559, it helps to know its practical contours. An action must be commenced within two years of the distribution, and a director who is sued may implead both the shareholders who received the distribution and the co-directors who voted for or consented to it, compelling pro rata contribution. Minn. Stat. § 302A.559.