Why Shareholder Lawsuits Against Corporations Rarely Win

If you become an officer or a director of a publicly held corporation, you will owe a duty of care to the corporation. This duty of care has three parts: (1) reasonable care; (2) good faith; and (3) reasonable belief. The reasonable care prong imposes a duty to oversee management and be informed of corporate decisionmaking; the good faith prong imposes a duty to not approve illegal, conflicting, or dishonest activity; and the reasonable belief prong imposes a duty to make decisions aimed at advancing the self-interest of the corporation.

Although these standards sound similar to negligence, they are much more stringent in application. It is extraordinarily rare for a director or officer to be found liable in court absent lawbreaking, conflict of interest, or fraud. These three rules were articulated in the 1984 Delaware Supreme Court case of Aronson v. Lewis, and although normally state court rulings are not … Read the rest of this article!