Fiduciary Duty

Quick Facts

Core duties: Care and Loyalty

Key jurisdiction: Delaware (where most large US companies are incorporated)

Standard of review: Business Judgment Rule (default)

Heightened scrutiny: Revlon duties, Entire Fairness

Fiduciary duty is the legal obligation of corporate directors and officers to act in the best interests of the corporation and its shareholders. Under Delaware law, this breaks down into the duty of care and the duty of loyalty—the fundamental standards governing corporate decision-making.

In Plain English

Directors have a legal obligation to look out for shareholders, not themselves. They must make informed decisions (duty of care) and avoid self-dealing (duty of loyalty). When they fail, shareholders can sue. When they succeed, courts defer to their judgment.

The Two Core Duties

Duty of Care

Directors must:

Be informed: Gather and consider material information
Act deliberately: Make reasoned decisions, not rash ones
Monitor: Oversee management and company operations
Attend: Participate in board meetings and activities

Standard: Gross negligence (not mere negligence)

A director violates the duty of care only through severe inattention or reckless disregard—not just by making a bad decision.

Duty of Loyalty

Directors must:

Act in good faith: Pursue the company's interests
Avoid conflicts: Not put personal interest above shareholders
No self-dealing: Disclose and abstain from conflicted transactions
No usurpation: Not take corporate opportunities for themselves

Standard: Entire fairness when conflicts exist

The duty of loyalty is the more serious obligation—violations cannot be waived through charter provisions.

The Business Judgment Rule

Delaware courts presume directors acted properly:

Presumption: Directors made decisions:

On an informed basis
In good faith
In the honest belief the decision benefited the company

Effect: Courts will not second-guess business decisions unless this presumption is rebutted.

Rebuttal requires showing: Directors were uninformed, conflicted, or acted in bad faith.

This protects directors from liability for honest mistakes and encourages risk-taking.

Heightened Scrutiny: Revlon Duties

When a company is "for sale," directors must seek the best price reasonably available for shareholders.

When Revlon Applies:

Board initiates active sale process
Company responds to bidder by breaking up or seeking alternatives
Approval of change-of-control transaction

What Revlon Requires:

Reasonable efforts to get best price
Level playing field for bidders (usually)
Informed decision about accepting final offer

Key Case: Revlon v. MacAndrews (1986)

Revlon's board favored one bidder over another for non-price reasons. The court held that once the company was for sale, the board's duty shifted to maximizing shareholder value.

Entire Fairness Review

When directors are conflicted (typically controlling shareholder transactions), courts apply the strictest standard:

Two Prongs:

Fair dealing: Process was fair (independent negotiation, informed vote)
Fair price: Consideration was fair

Burden Shifting:

Default: Conflicted party must prove entire fairness
With protections: Burden shifts to plaintiff if:
- Independent committee negotiated, AND/OR
- Majority-of-minority shareholder approval obtained

Key Case: Weinberger v. UOP (1983)

Established the entire fairness framework for controlling shareholder squeeze-outs.

Exculpation and Indemnification

DGCL Section 102(b)(7)

Delaware corporations can eliminate director liability for duty of care violations (but NOT duty of loyalty or bad faith).

Most companies include this provision, making duty of loyalty the primary litigation battleground.

Indemnification

Companies typically indemnify directors for:

Defense costs
Settlement payments
Judgments (subject to limitations)

D&O insurance provides additional protection.

Good Faith (The "Triad")

Some courts describe three duties: care, loyalty, and good faith.

Good faith requires directors to:

Actually try to advance corporate interests
Not consciously disregard duties
Not act with improper motives

Bad faith can include:

Knowing failure to monitor
Intentional dereliction
Conscious disregard of red flags

The Caremark doctrine holds directors liable for failure to implement adequate reporting systems.

Common Fiduciary Duty Scenarios

Scenario	Standard	Key Questions
Routine business decision	Business Judgment Rule	Were directors informed?
Sale of company	Revlon	Did board seek best price?
Defensive measures	Unocal	Proportionate to threat?
Controlling shareholder deal	Entire Fairness	Fair dealing and price?
Director self-dealing	Entire Fairness	Was transaction fair?

Practical Takeaways

For directors: Document your decision-making process. Get advice from independent advisors. When conflicts exist, recuse yourself or ensure proper procedures. The process matters as much as the outcome.

For shareholders: Fiduciary duties are your primary protection against board misconduct. In M&A, challenge deals where process was flawed or price seems unfair. Controlling shareholder transactions deserve extra scrutiny.

Proxy Fight — When shareholders challenge director judgment
Poison Pill — Defensive measure subject to fiduciary review
Staggered Board — Governance structure affecting director accountability
Appraisal Rights — Alternative remedy when duties may be breached