With Regard to the Duty of Directors and Officers to Act

Question

Examlex · Accepted Answer

The Answer is Directors and officers may be liable to the corporation for failure to act with due care and diligence. The Model Business Corporation Act (MBCA) requires that a director or officer discharge his duties with "such care as an ordinarily prudent person in a like position would use under similar circumstances." Thus, officers and directors are not liable to the corporation if they act with the common sense, practical wisdom, and informed judgment that could be expected of an ordinarily prudent person. Of course, the greater the actual qualifications of the individual, the greater the level of the duty that would be expected.
There are three dimensions to this prudent person standard. An officer or director will be found to have discharged her duty of care if she acts:
1. In good faith.
2. As would an ordinarily prudent person under like circumstances.
3. Under the reasonable belief that she is acting in the best interests of the corporation.
The duty of care requires that directors and officers make a reasonable investigation before making any corporate decisions. These standards, however, take into consideration the complexities of many corporate decisions and understand that it would be impossible for any manager to personally investigate every facet of every business decision. As a result, the MBCA standard permits directors and officers to rely on the opinions, reports, and statements of persons who reasonably appear to be competent and reliable.

With Regard to the Duty of Directors and Officers to Act

Definitions: