Regulation and Compliance

Question :

Fred and Wilma are directors of Sabbulonarium Corporation (SC), a gravel pit. Wilma is also the President. 

value if she held it for a few years because it was located next to a planned mall development. At dinner at Barney’s home, Betty told Barney about the planned mall development. 

Was Wilma’s oral release of Betty effective? Discuss.

Did Betty breach any fiduciary duty to SC? Discuss.

Answer :

The duty of care is entrusted upon the directors and officers of a business organisation. The directors and officers are required to act in as competent manner as would reasonably prudent person in their positions would have taken. Directors must make decisions in good faith, to be in the best interests of their companies and must make decisions after appropriate inquiries. The decisions must be the result of appropriate car. Thus, directors who fail to uphold their duties of care can be subject to held liable for any damages caused by these failures. But the directors are protected if they have taken decision out of good faith, on informed basis and by applying appropriate process even if such decision was unwise. Directors of a company are eligible for protection under the business judgment rule. Under this rule, they are not liable for breach of duties of care merely because they have made mistakes. But as said above, the decision has to be taken out of good faith and on application of proper process.

In this case, Wilma took decision on basis of the suggestion given by Betty. Wilma took no such duty of care to inquire about Betty's suggestions and because of the decision the company faced financial losses. Though Wilma took the decision out of good faith and followed appropriate procedures to officially release Betty from the contract but she failed to enquire the suggestion of Betty .Thus, she was not protected under the business judgment rule and her oral release was ineffective. 

The fiduciary duty  of obedience recognizes that directors must carry out their duties within the scope for the best interest of the company. As per fiduciary duty of good faith and faiir dealing, the directors must act with honesty, fairness and good faith in corporate dealings. The directors also have fiduciary duty of disclosure. Moreover directors owe a duty of loyalty. Directors are expected to put the welfare and best interests of the company above their own personal or other business interests.

In this case, Betty considered herown personal benifits above the best interests of the company. Though she entered into the contract before she became director, but she came to know about the appreciation of value of her land and misused her position to suggest Wilma to release her of the contract. Betty'sact was not in good faith and best interest of the company. Thus, Betty breached the fiduciary duty of obedience, loyalty and good faith.