About Officers and Directors

Being an officer or director of a public company is a highly profitable and prestigious position, but it also comes with fiduciary duties and statutory obligations. Today’s business environment is built on internal controls and transparency in financial reporting and disclosure, as well as legal compliance.

In addition to obligations under state corporation law, officers and directors personally have reporting and fiduciary duties under securities laws, the Sarbanes-Oxley Act of 2002 (SOX Act), and the Frank Dodd Act of 2010.

These regulations require officers and directors of public companies to perform their duties under the supervision of shareholders and regulators, and to comply with complex regulations based on internal processes and procedures, as well as external disclosures.

Some directors and officers may be held accountable for engaging in uncontrollable activities or illegal acts even though they are not at their own responsibility. Often, they do not understand that the main responsibility of corporate legal counsel is to protect the company, not the individual.

Directors’ Duties and Legal Responsibilities

The State Company Law stipulates that a company’s business and operations will be operated under the direction of the board of directors. Board members have fiduciary relationships with the company and shareholders and are obligated to act in the best interests of the company and shareholders, not their own.

Similar obligations are imposed on key executive officers.

Management Decision Rules

When executive officers make decisions based on proper processes, courts usually do not question those decisions. This is called the “management decision rule.”

• It is presumed that the directors acted in good faith, well-informed and believing it was in the best interests of the company (falsifiable).
• However, in cases of conflicts of interest or special transactions involving mergers and acquisitions, stricter screening is conducted.

Enhanced Screening and Comprehensive Fairness Standards

Enhanced Judging

It applies when directors or management have conflicts of interest.

Fully Fair Standards

If officers or directors involved in transactions profit from them, they must prove that the entire transaction is fair to shareholders.

Key Elements of Fiduciary Duty

1. Duty of Care Review all reasonably available critical information before making decisions.
2. Duty of Loyalty Act honestly for the best interests of the company and its shareholders.
3. Disclosure Obligation Provide accurate and complete information to the company and its shareholders.

Obligations During Acquisitions and Mergers

The board of directors must carry out the following:

• Determining whether the proposal poses a threat to business activities
• If it is a threat, take the minimum necessary measures to protect the company
• Do not prioritize personal interests over obligations to shareholders

The court places importance on the processes, procedures, and considerations conducted by the board of directors and executive officers rather than final decisions.

Attendance at meetings, deliberation time, and advice to third-party experts are also taken into account.

Conflicts of Interest – Standards of Fairness

Directors need to understand appropriate ways to respond to inevitable conflicts of interest.

• Key examples of conflicts of interest: transactions with companies, corporate opportunities, subsidiary bankruptcies, acquisitions by management
• Appropriate transactions are possible only when stakeholders are disclosed in advance and decisions are made by directors without interest
• Delaware General Corporation Code Section 144: Valid as long as proper disclosure, shareholder approval, and complete fairness are ensured.

Disclosure Obligations of Listed Companies

• SOX Regulation 404(a): Establishment, Maintenance, and Effectiveness Assessment of Internal Controls
• Exchange Act Section 13(d): Disclosure by Shareholders Holding More Than 5%
• Exchange Act Article 16: Reporting Obligations for Officers, Directors, and Shareholders Holding More Than 10%
• Insider Trading Ban: Trading stocks while holding important non-public information is prohibited

Directors and officers are advised to consult an attorney before trading shares to avoid violations of SEC rules.

Relationship with Corporate Counsel

The attorneys at ANTHONY, LINDER & CACOMANOLIS, PLLC understand the needs of corporate officers and directors. It is important to build a relationship with an outside lawyer beforehand, not after problems arise.

• Receive prompt legal advice during a crisis
• Advice from independent experts is essential for protecting directors.
• Supporting the maintenance of a sound corporate governance system

Contact Us

Please contact us by email or by phone 877-541-3263.