The following Information deals with suits by shareholders and corporate officers and directors:
Fiduciary Duty: Corporate directors can only be subject to fiduciary liability (a lawsuit) for implementing unfair, self-dealing transactions or for participating in alleged fiduciary breaches in which they themselves benefit. States generally impose three primary fiduciary duties on the directors of corporations; the duty of care, the duty of loyalty, and the duty of good faith. The shareholders of the corporation are entitled to rely upon their board of directors to discharge each of their three primary fiduciary duties at all times. The duty of good faith may be breached where a director consciously disregards his duties to the corporation, thereby causing its stockholders to suffer
Business Judgment Rule: The business judgment rule is a presumption that in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company. When a board of directors makes a decision, it enjoys the protection of the business judgment rule. In other words, a decision is not subject to a lawsuit if it was a bad decision, so long as the director makes a decision in good faith when he exercises a good faith effort to be informed and to exercise appropriate judgment.
Derivative Suit: In a derivative suit, an individual shareholder seeks to enforce a right that belongs to the corporation. However, given the basic principle of corporate governance that the decisions of a corporation, including the decision to initiate litigation, should be made by the board of directors or the majority of shareholders, most jurisdictions require a pre-suit demand be made of the corporation’s board of directors. This allows the directors to exercise their business judgment and determine whether litigation is in the best interest of the corporation.
Futility: The futility exception to a demand establishes the circumstances in which the shareholder is allowed to circumvent the directors’ authority to manage corporate affairs. Demand may be excused if in rare cases a transaction may be so egregious on its face that board approval cannot meet the test of business judgment, resulting in a substantial likelihood of director liability, or if the directors exhibited gross negligence in breaching their duty of care.