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Directors make decisions important to the business and also monitor the business. Issues of breach of duty of care can arise in two kinds of situations:

  • (1) Malfeasance
  • (2) Nonfeasance

With the duty of care, directors are only liable for neglecting their duties, not for misjudgments and, thus, any judicial inquiry focuses on the decision-maing process, not the decision with the burden of proof on the plaintiff.

In either case (malfeasance or nonfeasance), the decision are protected by the business judgment rule (a judicial principal and a tool of judicial review), which presumes that dierctors have acted in good faith and in the corporation's best interest.

See

Kamin v. American Express Co.,

MalfeasanceEdit

Due care for directors requires that they be informed and deliberate when making a decision. Malfeasance occurs when a decision is made in a negligent manner; that is, they are accused of violating the duty of care by making a negligent or ill advised decision, which can involve a decision not to act (due care for directors requires that they be informed and deliberate when making a decision).

Directors can be accused of malfeasance if they violate the duty of care by making a negligent or ill advised decision, which can even involve a decision not to act. The duty of care sets a standard of conduct while the business judgment rule limits judicial inquiry into business decisions and protects directors who are not negligent in the decision making process.

CausationEdit

In malfeasance there is an actual action to relate to the losses.

The Delaware Supreme Court has take a more limited view of who has the burden on causation in cases of malfeasance. If plaintiff can prove a breach of duty of care, in making a decision, there is a prima facie case of liability even without casuation and showing of injury.

In Cede v. Techincolor, the court indicated that requiring proof of injury by the plaintiff was unnecessary and undermined the business judgment rule that placed the initial burden on the plaintiff to prove that the rule did not apply. If proof of injruy were also required by the plaintiff before the burden shifted to the defendant, then the effect would be to replace the business judgement rule's use of a burden-shifting process to an adjudication of liability. The fact that the plaintiff has proven enough to rebut the business judgement rule does not mean the plaintiff has won. It merely shifts the burden adn the defnedants may still be able to prove entire fairness by presenting evidence of the cumulative manner in which she discahrged her duties. Damages are determeind after it is found that the trasactino was not entirely fair.


NonfeasanceEdit

There is a failure to act or monitor where a loss could have been prevented

The duty of care requires directors to undertake certain responsibilities. In Francis v. United Jersey Bank , the court spelled out what is expected of directors:

  • Generally, directors should have some understanding of the business, keep informed on activites, perform general monitoring including attendance at meetings, and have some familiarity with the financial status of the business as reflected on the financial statements.
  • In addition, Francis v. United Jersey Bank recognized that responsibilities of directors vary depending on the type of corporation they work for; for instance, the duties of directors of publicly traded corporations generally are greater than that of closely held corporations.

CausationEdit

The fact that a director breaches her duty and is negligent does not mean that the director is liable for damages. Traditionally, for there to be liability that negligence must be the proximate cause of the loss.

In order to find causation, one must finding a link between negligence and damage; however, this is difficult, especially in nonfeasance cases because the director failed to act. That is, in nonfeasance one needs to prove that if the director had done her duty there would not have be damage (that is causation in fact). Because there is no certainty what would have occured if the fiduciary had acted differently, the issue is whether it is reasonable to conclude that the failure to act was a substantial factor in producing a particular result. Thus, courts faced with an allegation of nonfeasance would have to determine the reasonable steps a director would have taken and would it, as a matter of common sense, have averted the loss.

In the Francis case, a nonfeasance case, Mrs. Pritchard was found to be negligent. But the plaintiff had to also prove that her negligence caused the harm and the extent of the damage. While her sons were responsible for the theft, her nonfeasance was a substantial factor in the loss. She was not monitoring them and according to the court "they spawned their fraud in the backwater of her neglect." Mrs. Pritchard could claim that even if she had done her duty and discovered the theft, her protestations or registration would not have stopped the theft and therefore there was no causation. The court recognzied that proof of causation was difficult yet found that it can still be inferred if the director's negligence was a substantial factor in the loss. In Francis, the court believed that her resignation might have stopped the illegal loans but went even further, indicating that Mrs. Pritchard shouldl have taken steps to stop the covnersion, including hiring an attorney and threatening to sue. This expadned responsibility were related to the nature of the reinsurance bsuiness where funds are being held in a trust like stuation and may not hold true in other closely held corporations. Thus, the extent of the duty imposed on directors would depend on factors including the nature of the business. Although causation was found in Francis, its proof was difficult.

In barnes v. Andrews, Judge Learned Hand found an outside director negligent for his inattention, but not liable for damages. Plaintiff had failed to show how the director's lack of performance would have avoided the loss and what actual loss would have been avoided. A business can fail for many reasons and thus, imposition of liability depends on proof of causation. The decision also expressed the concern of attracting outside directors to serve if they were held liable without proof that their negligence cause harm.

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