Corporate law is a legal term that refers to the written body of laws and regulations which govern how corporations are formed, as well as their interactions with other companies, individuals, their shareholders, and the public. Corporate laws address the rights and responsibilities of all people who are involved with the operating, owning, and management of the corporation.
A corporation is defined as a specific type of business structure that is created and regulated by state law. More specifically, a corporation is typically defined under corporate law statutes as a legal entity that is separate from its owners, or its shareholders. This means that only the corporation itself can be held liable for corporate obligations, such as maintaining certain business records.
In general, a corporation is classified according to specific factors such as:
- The corporation’s tax structure;
- The purpose of the corporation; and
- The number of shareholders and amount of stock to be issued by the corporation.
Examples of common forms of corporations include:
- C Corporations;
- S Corporations;
- Non-Profit Corporations;
- Business Corporations;
- Professional Corporations;
- Foreign Corporations; and
- Public or Private Corporations.
It is important to note however that the term corporation generally refers to the two main categories that corporations are divided into according to tax laws: C Corporations and S Corporations. The defining difference between these two forms of corporations is that C Corporations are taxed separately from their owners, while S Corporations are not.
Examples of common characteristics of corporations include:
- Decreased or limited liability of members of the company;
- Separate legal personality of the company, meaning that a corporation may be treated as an “individual” for some purposes;
- Different rules regarding stocks and ownership of the company;
- Increased rights and responsibilities of the board of directors and other leaders; and/or
- Preferential tax treatment, in many states.
How Are Corporations Formed?
Corporations are generally created by complying with all of the state corporate laws that outline how to properly form a corporation. Most states base their laws on a model act known as the Revised Model Business Corporation Act (“RMBCA”).
In general, a corporation is formed when articles of incorporation are first filed with the Secretary of State. In order to form the articles of incorporation, the individual owners or shareholders must agree on a number of factors, including:
- What the name of the corporation will be;
- The amount of shares that the organization is authorized to issue;
- The amount of shares of stock that each owner will initially buy;
- The total amount of money each owner will contribute to the purchase;
- The specific type of corporation that is to be formed; and
- The people who will form and manage the corporation, which are commonly referred to as the board of directors.
Once again, each state has its own corporate law requirements, and as such there may be additional factors that need to be addressed when forming a corporation.
What Is a Board of Directors?
In short, a board of directors is the center of corporate power within a company. Under the corporate laws of most states, the board of directors is the group that holds the authority to manage corporate business and affairs. As such, the board of directors is responsible for developing corporate strategies for the company and its shareholders.
Although the board of directors are shielded from certain liabilities within certain forms of corporations, such as limited liability corporations (“LLCs”), the board of directors and individual board members will be liable for actions that they take which are not:
- Made In good faith;
- Performed with ordinary care; and/or
- In the best interests of the corporation based on the reasonable beliefs of the directors at large.
It is important to note that the biggest way in which a board member can be held liable for their actions is by violating their fiduciary duty.
What Is a Board of Directors’ Fiduciary Duty?
Fiduciary duty is one of the highest legal duties that is imposed by the United States legal system. The term fiduciary duty refers to the legal obligation of the fiduciary to act accordingly in the best interests of their principal(s). A fiduciary is a person responsible for taking care of money or other assets for the benefit of another person or entity, known as the principal.
A fiduciary duty is composed primarily of two equal duties: the duty of loyalty and the duty of care. In the corporate setting, a fiduciary owes the principal a duty of loyalty. This means that the fiduciary must act at all times in the business’s best interest, even over their own self-interest. As such, a board member as a fiduciary must avoid any conflicts of interest that may arise between their interests and the interests of their principal, i.e. the shareholders of the company.
Board members must also avoid any conflicts that may arise between other clients of the fiduciary, as well as not self-deal or profit from their relationship with the principal. It is important to note that when given express or informed consent from the principal, a board member may engage in such activities.
The duty of care is a term that refers to the legal responsibility of a fiduciary to act according to a standard of reasonable care. In essence, this means providing acting in a way that is typical for a person to act that is in a role similar to themselves.
When a board member does not act in the business’s best interests or otherwise violates their fiduciary duty to the shareholders or business owners, then a civil suit may be initiated by the injured party to recover against the company or that member for the breach of fiduciary duty that occurred.
What Constitutes a Breach of Fiduciary Duty for a Board of Directors?
Once again, if a board of directors or individual board member violates their fiduciary duty to the company, then they may be considered to have breached their fiduciary duty. The exact legal elements for breach of fiduciary duty vary somewhat by state.
However, typically the following elements need to be proven in order for a plaintiff (i.e. the party that was injured) to succeed in a civil lawsuit for breach of fiduciary duty:
- First it must be proven that a fiduciary relationship exists between the plaintiff and the breaching party;
- The plaintiff must then outline the scope of the relationship and the duties of the fiduciary;
- Next, the plaintiff must prove that the defendant breached their duties as outlined in the scope of the relationship, such as by violating the corporations charters and by laws; and
- Finally, the plaintiff must show that they were actually harmed, which is typically proven by showing some quantifiable financial loss.
If a plaintiff is able to prove the above elements, then they may be able to initiate a successful lawsuit against the fiduciary. However, in many fiduciary relationships, there are arbitration clauses that may prevent plaintiffs from being able outright sue a business for breach of their fiduciary duty.
What Are Examples of Breaches of Fiduciary Duty?
Once again, a board of directors owes some form of fiduciary duty to the company and any shareholders. The most common place where a board member’s fiduciary duty is identified is in the company’s organizational documents. The initial organizational documents , such as the company’s charter and by laws, will typically define the board of directors fiduciary duties.
Examples of common breaches of fiduciary duty in a business by a board of directors or board member may include:
- Acting in a way that is contrary to the best interests of a business client or against the best interests of the business;
- Self-dealing, i.e. acting in the fiduciary’s self-interest, rather than the best interests of the client or business;
- Misappropriating funds, which is known as embezzlement;
- Misrepresenting important facts, such as lying to shareholders about the company’s financial data; or
- Otherwise neglecting their duties or responsibilities to the business.
Do I Need an Attorney for Help With My Responsibilities as a Board Member?
If you are on the board of directors for a company and you do not fully understand your responsibilities as a board member, you should contact an experienced commercial lawyer to assist you in understanding your responsibilities and the extent of your liabilities.
An experienced commercial attorney will be able to help you ensure that you do not violate any of your fiduciary duties. Additionally, an attorney can also represent you in court if a lawsuit has been filed against you.
