Degree of Culpability

Typically, directors who conduct the corporation's business must exercise the care that an ordinarily prudent person would exercise in the management of his or her own affairs under similar circumstances. This "ordinary" standard of care has been adopted by a majority of states and enacted in their corporation statutes. However, courts consistently interpret the culpability standard for the duty of care as one of gross negligence. As one Delaware court stated, gross negligence is "the proper standard for determining whether a business judgment reached by a board of directors was an informed one." Thus, a director whose breach of the duty of care rises to the level of ordinary negligence is generally protected by the business judgment rule. In those states that do not recognize the business judgment rule, simple negligence is the standard of liability.

The definition of "gross negligence" differs greatly from state to state, but it is interpreted by some courts (notably Delaware courts) as encompassing reckless corporate conduct. The Delaware courts' designation of recklessness as a subset of gross negligence represents a departure from the majority view. The term "recklessness" may also be variously defined, but it typically is denoted as the "careless disregard of a substantial and justifiable risk" or "careless disregard of the corporation's best interests." In Delaware, a plaintiff will likely have to produce evidence that a director acted cavalierly without considering the corporation's best interests in order to prove that the conduct was grossly negligent.

Following Delaware's lead, many states have enacted statutes that additionally protect directors from personal liability. Delaware's corporation statute eliminates or limits a director's personal liability to the corporation or its shareholders for money damages that arise from a breach of a fiduciary duty as a director. Thus, directors (governed under Delaware law) are shielded by statute from personal liability for a breach of the duty of care that rises to the level of gross negligence. Delaware courts have not yet clearly indicated whether the statute also limits or eliminates personal liability for a breach of the duty of care that rises to the level of recklessness. Clearly, the statute does not protect a director who does not act in good faith. The Sixth Circuit, interpreting Delaware law, has concluded that the duty of good faith can been breached when a director consciously disregards his corporate duties and causes the stockholders to suffer. The Seventh Circuit Court of Appeals has also concluded that the statute does not protect directors from liability that arises from reckless conduct.

Copyright 2011 LexisNexis, a division of Reed Elsevier Inc.


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