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Legal responsibility of Company Director in California

Business Law

Legal Research Paper

The objective of this project is to familiarize the student with applicable legal restraints on business. It is important that each prospective business manager be able to locate applicable law regulating the business activity; be able to understand the goal sought by the legislation; be able to understand and apply current interpretation of such legislation; and be able to current interpretation of such legislation; and be able to conform decisional activity to the requirement imposed by such legislation.


Answer

Introduction

Statute laws and several others federal regulators intend to impose constraints in certain debauch trade practices in order to prevent deceptive trades, gross violations of environmental legislation, money laundering by fraudulent agents and breaching of promised contracts. In terms of Corporation law, the Californian federal statute have devised Social Purpose Corporations act in order to refrain the management representing a certain trade from getting involved into rogue practices. The California code with the unique Corporations code of CORP 2700 has framed their entire interest upon the obligations of a director to perform their statute-approved duties with integrity while maintaining the identical demeanor of a common server of the enterprise.

This study suite caters the duty to encourage the awareness of the potential directors of a management regarding the particular act. In my individual statement it interests me since most of the directors are prone to take advantages of their designation and let themselves into debauch practices that will cause the respective organization to succumb. In this context, it is imperative to evaluate the embedded notions of Californian corporation statute in order to pave them into the domain of fair trade practice.

Legislation

According to the subdivision (a) of Section 2603 and several other corresponding sections, a director is supposed to perform the globally acknowledged duties of a director as any common member of any committee of the board that the director is destined to cater. In this regard, as the legislative instructions suggest, the director is supposed to be advocated by good faith and the approved manner of a director without involving into any activity that might dispense anything resonating with despotism (Gevurtz, 2015). 

Rationale

Corporation Code 309 was amended and then the Corporation code section 1203 was also amended in order to improve the situation regarding the mistreatment of the shareholders dew to improvident and unloyal directors. Although the directors were obliged with a number of globally recognized duties, the law did not intend to benefit the shareholders. The major intention of implementing the act was to ensure the rights of the shareholders along with the decisions of the Corporation that they own. 

As per the act when the directors perform in their utmost capability as corporate directors they are to be constrained by certain fiduciary duties that they are obliged to abide by because of their role under the corporation and their relationship with the shareholders. The duties of the director was initially defined by the Case law but the experts however, were not satisfied with the existing exhibition of the law. The General Corporation Law enacted in 1977 did not provide required guidance for the directors. However, section 309 of the 1977 GCL defined the standard duties in compliance with the section 300 (Lan, 2015). The scope of section 309 was further amended in 1987. In order to understand the scope of subdivision (a) of Section 2603 it is potent enough to examine the legislative history of the statue and the common law standards of care.

Corporation code is subjected to change and it was revised accordingly in order to increase its effectiveness. Section 309 has been a part of necessary comprehensive revision and before this revision the duties and the definition of the care related to the director’s liabilities were limited to the case law and section 820 of pre 1977 Corporation’s Code. Most of the case laws associated with director’s conduct and the appreciation of the certain fiduciary duties but did not attempt to define a code of conduct for the directors in general. 

The drafting committee created a new statue, namely section 309 in 1975 and it was a part of the newly conceived General Corporation Law. It subsequently defined the directors’ code of conduct and standard of care that the directors required to follow. The model was drawn heavily from the proposed revisions to section 35 of the 1969 Model Business Corporation Act. The revisions of section 35 of MBCA has been done in order to codify the concept of case law which has been pertinent in the “business judgment rule” which was a part the general fiduciary duty of the directors due to the care that the corporate directors owed (Lan, 2015). Another important fact is that the drafting committee was also very much motivated by the fact that several other judiciaries codified the case law concepts concerning the possibility of application regarding the standards of care which is required by the directors in their exercise of power. 

As far as history is concerned California Courts have examined directors’ conduct pursuant to the duty of loyalty and duty of care along with the business judgment rule. It is important to note that under the business judgment rule directors are protected from liability for most of the decisions that are the results of managerial decision making powers.

Subsequent case analysis 

Facts

Remillard Brick Co. v. Remillard-Dandini

Informative discussion regarding the act under study can be established. As per the information of the case two defendants Stanley and Sturgis were directors and officers of two different manufacturing companies and that are Remillard Brick Company and Remillard-Dandini Company (law.justia.com, 2017). The issue arose at a directors’ meeting in which both the companies participated and they subsequently proposed separate sales units of both the companies. They also proposed a transfer to Remillard-Dandini Sales Corporation which is a company in which both of the mentioned companies were sole owners and operators (law.justia.com, 2017). In this case when the matter of vote was taken under consideration in favor for the proposal both of the defendants voted for it. Moreover they continued their act in their capacity as the officers and they also obtained sales contracts between the two manufacturing enterprises and Remillard-Dandini Sales Corporation.


Issues

When the issue reached at court, the court indicated that the defendants have practiced their power for their own advantage in order to cater to their interest (law.justia.com, 2017). Because of such practice of their individual power the situation was further complicated and a conflict of interest emerged due to such practice regarding their own needs and it also had superseded their needs and the profit of the shareholders.

In order to affirm the trial court’s decision to set aside the sales contracts as breach of the defendants’ duty of loyalty. It is important to note that the Court also stated that these directors had a fiduciary relationship to the corporation and its shareholders requirement regarding their behavior towards them in good faith.


Law

Duty of Loyalty and Due Care

As mentioned by the common law duty of loyalty it is important for a director to cater certain rules and regulations and a director must exercise:

  • The duty to affirmatively protect the interest of the corporation that is subjected to the corporation of which the director is in charge.
  • The director needs to be refrained from the activities that can affect adversely to the corporation.
  • He is liable not to deprive the corporation from any profit or advantage which can be brought through his skills.
  • It is important for the director to practice lawful exercise of his power.


Analysis

It is important to note that the corporate directors are charged with an affirmative duty of care in order to keep reasonably informed the shareholders of the internal affairs and the decisions of the corporation. This is significantly important for the shareholders and the stakeholders in order to use the necessary information in the process of their decision making authority. Therefore it is evident that even without any conflict of interest they can be liable for any kind of negligence regarding their duty of loyalty. 


Conclusions

The case of Burt v. Irvine Co. can be cited. In this case the court addressed the issue of care that is associated with an issue which had been raised during a shareholder’s derivative suit (law.justia.com, 2017). Initially while addressing the duty of loyalty the court afterwards indicated that the liability for failure to exercise the duty of loyalty can take place due to the following practices:

  • If the loss of the stakeholders are due to the failure regarding the exercise of the proper care, diligence and skills.
  • The court stated that the directors are not bound to be honest but it is important for the directors to practice their power accordingly and they needs to be diligent.
  • The directors require to be careful in the practice of their undertaken duties.

●       The corporation has the power to hold the directors responsible for their error of judgment due to mere carelessness or want of ordinary skill and prudence.

The court ultimately attempted to reconcile the business judgment rule and through implementing the duty of care through the indication that in order to apply the rules it is important for the directors to comply with the common law that is associated with the duty of care.


Conclusion

With the amendment of section 309 along with the enactment of section 1203 it is evident that California Legislation has responded to the needs of the shareholders and the stakeholders of corporations. 

Social Impact

These statues have put light on the duties of the directors toward the shareholders and has highlighted in case of section 1203, it has increased. Section 309 as per the amendment of 1987 has refined the standard of care which the directors have to use in the effectuation of their duties. The legislature has affirmatively served the purpose by effectively providing the director’s duties towards the shareholders as well as the corporation (Eisenberg, 1989). Another important factor is that the directors are provided with the opportunity of undertaking their subsequent business judgment according to their organizational pursuits. Their judgment is however subjected to scrutiny in order to perceive their intention towards the shareholders. Evidently sections 309 and 1203 have proved to beneficial for both the directors and the shareholders through greater protection and have provided respective guidance.

As far as its social impact is concerned the shareholders have the opportunity to complaint against any possible breach from the side of the directors and it has secured their position further. The most critical perspective of this act is that it has significantly increased the directors’ liability towards the corporation and the shareholders. It has helped to increase the honesty related to any business activity and the directors can not be concerned with their individual profit and benefit. The increased demands that have been placed upon the directors have sharply decreased the corporation reorganizations. The California shareholders have received a substantial boon through sections 309 and 1203.

Personal Opinion

It is important to have such law in federal level as it ensures profit of greater population. Not only the directors but the corporation and the shareholders’ rights are protected under this act as it relives the directors from practicing unethical use of power. Eminently, it has reduced the scope of culminating greater power for individual benefit and has facilitated the path of distribution of corporate power. Otherwise, accumulation of total power in the favor of the directors can lead to adverse situation for the corporation and the stakeholders as well.

In my opinion it is one of the most effective laws that caters the need of greater population and also protects the rights of several contracts and agreements. It is important to implement such laws in order to prohibit unethical practice of excessive power of the directors of the corporation. As the shareholders of the corporations rely solely on the directors of the company it is important for the directors to act in accordance to the subsequent loyalty and serve accordingly. Thus it is important to have a coherent approach towards the codes of conduct. This act has tremendous social impact. There are several unaddressed needs of the shareholders that did not gain much importance and the directors of the corporations also did not have any specified code of conduct. Directors of business units are important part of any organization and the benefits and profits of the organization and the shareholders are associated with his skills and official responsibilities. Therefore evidently the directors have much scope of catering their individual interest through their business activities and the shareholders can fall victim of such practices 





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