Quiz 40: Corporate Directors, Officers, and Shareholders
A director can serve on board of more than one organization. when some transaction between two firms takes place and director is serving on both the firms the conflict of interest takes place. Whenever there is conflict of interest, the director is required to disclose all the information regarding the nature of conflict. This is also known as full disclosure. They are required to disclose the facts regarding transaction. Also, they must abstain from voting. If the director does not abstain from voting, then contract formed after such voting can be voided. In this case, it is clear that there were 5 directors on the board of company O including person W. However, W did not disclose the conflict of interest with company WI to all of them. He just disclosed it to other two directors only. Neither he abstained from voting. Thus, it can be said that director violated the section 713 of corporation act and thus the contract is not binding on the corporation.
In the context of company affairs, the duty of loyalty demands that the directors and officers should subordinate their personal interests to the ultimate objective of the corporation. Directors cannot use the funds of the corporate or restricted corporate information for private advantage and must avoid in indulging in personal-dealing. Apart from the above the directors also possess Duty of Care and Conflicts of Interest towards the firm.
Case introduction: E, D and M are the board of directors of the company AS, which has nearly five hundred shareholders. G became the president by two-to-one vote as M dissented and it was not recorded in the minutes of the meeting. Later they realised that G is a convict and involved in embezzlement. Case analysis: When any corporation or the employees of corporation involves in illegal activities or criminal activities, the directors are held liable for such actions. The direct should act in good interest of its shareholders and exercise care in business. If they failed to exercise due care, they are held liable for their negligence. However, there is an exception under business judgment rule. Directors and officers are exposed to liability on many circumstances if they are negligent in their work activities and they can also held liable if they committed an y crimes and torts personally. According to business judgement rule, the directors are responsible for their mistakes in decision making without any intent to cause loss for shareholders. Here in this case scenario, no investigation was conducted by the directors to determine G's past records before taking decision to make him the president of the corporation. This is a clear breach of the directors' duty. The directors did not execute their duties with care that an individual should fulfill their duties under similar conditions. Hence, the corporation can held the directors personally liable for the actions of G.