As a corporate officer, you always try to make good decisions on behalf of the corporation. Still, you could make a decision that causes the corporation to suffer losses. Does this mean that you breached your duty of care?
The fiduciary duty of care
Officers of a corporation have a fiduciary duty of care. This is a duty to make decisions and perform other actions as an officer in a reasonably diligent and prudent manner and in good faith.
Officers must act in the best interest of the corporation. They must perform their duties in the way an ordinarily prudent person in the same circumstances would. This is the same standard used in negligence cases.
The duty of care and the business judgment rule
If an officer is accused of breaching their duty of care, they could face a lawsuit. The court will determine whether a breach occurred using the business judgment rule.
The court will uphold the officer’s actions and determine there was no breach if:
- The officer acted in good faith
- The officer used the care a reasonably prudent officer would have and did not waste corporate funds or resources,
- The officer performed adequate due diligence, and
- The officer reasonably believed they were acting in the corporation’s best interests
However, the business judgment rule can be overcome. If the person bringing the lawsuit can show the director was grossly negligent, acted in bad faith, or there was a conflict of interests, the court will not follow the standards under the business judgment rule.
Determining whether you breached your duty of care as a corporate officer can be difficult, but it is possible to prevail just as it is in other corporate employment law cases. Officers must act in the corporation’s best interests and ultimately most do, even when things do not go as planned.