Are Board Members Fully Protected?

In the complex realm of corporate governance, the shield of legal protection for board members against officer and director liability claims may not be as impervious as it seems. Kenneth A. Rosen's insightful exploration underscores the need for enhanced diligence by boards, especially in evaluating transactions outside the ordinary course that significantly impact a company's financial landscape.

The Model Business Corporation Act provides a framework for reliance on information, opinions, and reports by directors, but Rosen illuminates the nuanced limitations within. Directors must actively rely on information, ensuring it aligns with their understanding and expertise. They cannot turn a blind eye to unwarranted reliance, and they must question advice inconsistent with other information.

Delving into Delaware law, Rosen introduces the concept of being "fully protected" while relying on expert advice. However, a crucial caveat emerges from the Delaware Court of Chancery's decision in In re Rural Metro Corporation Stockholders Litigation —even if directors follow expert advice, they could be deemed to breach fiduciary duties if the process falls outside the range of reasonableness.

Rosen advocates for heightened vigilance among directors, urging them to be inquisitive when certain matters come before the board. Transactions with potential insider benefits, significant changes in the capital structure, or those involving financially distressed companies should prompt thorough inquiry. The lesson is clear: material, out-of-the-ordinary transactions demand a three-party discussion involving the board, management, and professional advisors to safeguard against fiduciary breaches.

While legal protections offer financial insulation, Rosen emphasizes the intangible risk of reputational damage. The article goes beyond legal frameworks, urging directors to embrace a culture of caution and thorough scrutiny. In the evolving landscape of corporate governance, the article serves as a guide for directors navigating the delicate balance between legal safeguards and the responsibilities inherent in preserving a company's integrity.