HAHN AGENCY, INC.HAHN AGENCY, INC.
General Principles Governing D&O Liability
As mentioned under the directors and officers liability exposure section, The Directors and officers are subject to three basic duties in performing their responsibilities. In addition, this section looks at the Business Judgment Rule which is an excellent "test" of an individual decision. If a decision can meet the criteria posed by the Business Judgment Rule, than you will have an excellent defense against a directors and officers claim. toplist
The three duties of a director and officer of an Organization are as follows:
Directors and officers generally must act with the care that a reasonably prudent person in a similar position would use under similar circumstances. They must perform their duties in good faith and in a manner they reasonably believe to be in the best interest of the corporation. Prior to making a business decision, D&O's must inform themselves of all material information reason-ably available to them.
Informed decisions
This duty requires not only reasonable behavior with respect to matters submitted for approval, but also requires reasonable inquiry and monitoring of corporate affairs. Although directors and officers are not insurers of the integrity of their subordinates or of general organizational performance, they are required to implement reasonable programs to promote appropriate organizational conduct and to identify improper conduct.
Must implement reasonable program to promote conduct and identify improper conduct.
In some jurisdictions, this duty of diligence may be higher for D&O's of charitable or other types of non-profit entities. The higher standard of care is similar to the high fiduciary duty owed by trustees to beneficiaries of the trust they administer. The justification for this higher standard is the perception that the non-profit D&O's are entrusted with assets and responsibilities for the benefit of people who have little or no input into the selection of the D&O's.
Directors and officers are required to refrain from engaging in personal activities which would injure or take advantage of the organization. They are prohibited from using their position of trust and confidence to further their private interests. This duty requires an undivided and unselfish loyalty to the organization and demands that there be no conflict between one's duty to the organization and self-interest. Examples of prohibited conduct in this regard include:
Directors and officers are required to perform their duties in accordance with applicable statutes and the terms of the organization's charter D&O's may be liable if they authorize an act which is beyond the powers conferred upon a corporation by its charter or by the laws of the state of incorporation.
Non-profit organizations are frequently regulated by a multitude of statutes, rules and regulations with which outside directors are typically unfamiliar For example, charitable organizations may be subject to statutes regulating fund raising, political and business activities; hospitals may be subject to complex Medicaid reporting requirements; and publicly supported organizations may be subject to unusual terms and restrictions in various grant or financial assistance documents.
If the non-profit organization is exempt from federal or state income tax or if contributions to it are intended to be tax deductible, a myriad of additional restrictions and requirements may apply. For example, the corporation may jeopardize its tax exempt status if its earnings privately inure to the benefit of any individual, it if is operated for non-charitable purposes, if it engages in certain types of political or legislative activities, if it fails to file or obtain required returns or certificates or if as a private foundation it violates any of a series of rules prohibiting the appearance of self-dealing, large business holdings and the like. Failure to comply with these technical requirements may subject the D&O's to personal liability for the damage thereby caused to the organization and perhaps others.
D&O’s must abide by charter and by-law rules, Statutory guidelines and tax law.
Directors are presumed to have acted properly and to have satisfied these three basic duties if the Business Judgment Rule ("BJR") applies. The BJR recognizes that not all decisions of directors will result in benefit to the organization and that directors will be personally liable for loss to the organization only if the elements of the defense are not satisfied.
Not all decisions may not be beneficial, but can be defended.
To obtain the benefit of this important defense, directors must act in good faith and with a reasonable basis for believing that their conduct is in the lawful and legitimate furtherance of the organization's purposes and must exercise their honest business judgment after due consideration of what they reasonably believe to be the relevant factors.
Five elements of the BJR are generally recognized:
| 1. Business decision. |
| 2. Disinterestedness |
| 2. Due care. |
| 4. Good faith. |
| 5. No abuse of discretion. |
1. Business decision.
The BJR protects directors against claims for wrongful acts, but not against claims for failure to act. Inaction by directors is protected by the BJR only if it is a result of a conscious decision to refrain from acting.
Inaction is not a defense, there must be a conscious design not to act.
2. Disinterestedness.
The BJR protects directors who are disinterested and independent with respect to the challenged action. For this purpose disinterested directors are those who neither appear on both sides of the transaction nor expect to derive any personal financial benefit from it in the sense of self-dealing, as opposed to a benefit which inures to the corporation or all the stockholders generally.
Must not appear in disputed transaction at all nor expect to gain an advantage.
3. Due care.
The BJR protects directors if they reached an informed decision after making a reasonable effort to ascertain and consider all relevant information reasonably available to them and after reasonably deliberating the decision.
Must consider and deliberate all information.
4. Good faith.
The BJR protects directors if they acted with a good faith belief that their business decision was in the best interests of the corporation. The protection will not apply if the directors acted solely or primarily to preserve their positions or otherwise to benefit themselves.
Firmly believe decision was in best interest of the Organization.
5. No abuse of discretion.
The BJR protects directors against honest errors of judgment, but does not provide protection for decisions that cannot be supported by some rational basis and are egregious on their face.
Decisions must be based upon reasonable information.
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Organization Loss
Control Sections: Management/Composition of Board/Education/Actions by Directors/Delegation/Conflicts of Interest/Legal Protections |
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