Duty of Care and Duty of Loyalty
Although a distinct common law concept from duty of care, duty of loyalty is often evaluated by courts in certain cases dealing with violations by the board. While the business judgment rule is historically linked particularly to the duty of care standard of conduct, shareholders who sue the directors often charge both the duty of care and duty of loyalty violations.
This forced the courts to evaluate duty of care (employing the business judgment rule standard of review) together with duty of loyalty violations that involve self-interest violations (as opposed to gross incompetence with duty of care). Violations of the duty of care are reviewed under a gross negligence standard, as opposed to simple negligence.
Consequently, over time, one of the points of review that has entered the business judgment rule was the prohibition against self-interest transactions. Conflicting interest transactions occur when a director, who has a conflicting interest with respect to a transaction, knows that she or a related person is (1) a party to the transaction; (2) has a beneficial financial interest in, or closely linked to, the transaction that the interest would reasonably be expected to influence the director's judgment if she were to vote on the transaction; or (3) is a director, general partner, agent, or employee of another entity with whom the corporation is transacting business and the transaction is of such importance to the corporation that it would in the normal course of business be brought before the board.
Read more about this topic: Business Judgment Rule
Famous quotes containing the words duty of, duty, care and/or loyalty:
“The whole duty of government is to prevent crime and to preserve contracts.”
—William Lamb Melbourne, 2nd Viscount (1779–1848)
“If there is ANY THING which it is the duty of the WHOLE PEOPLE to never entrust to any hands but their own, that thing is the preservation and perpetuity, of their own liberties, and institutions.”
—Abraham Lincoln (1809–1865)
“Alas! regardless of their doom,
The little victims play!
No sense have they of ills to come
Nor care beyond today.”
—Thomas Gray (1716–1771)
“As we try to change, we will discover within us a fierce struggle between our loyalty to that battle-scarred victim of his own childhood, our father, and the father we want to be. We must meet our childhood father at close range: get to know him, learn to forgive him, and somehow, go beyond him.”
—Augustus Y. Napier (20th century)