In a recent decision, the Massachusetts Supreme Judicial Court ruled that directors of a corporation owe a fiduciary duty to the corporation itself, and not to the stockholders of the corporation (as is the case in Delaware, among other states). In Int’l Brotherhood of Electrical Workers Loc. No. 129 Benefit Fund v. Tucci, SJC-12137 (Mass. Mar. 6, 2017), the Court ruled that the directors of EMC Corporation did not breach their fiduciary duties to the corporation when they approved the sale of EMC as a whole, versus selling off the constituent operations individually, which might have brought a higher price. The Court relied on the plain language of M.G.L ch. 156D, Section 8.30, which provides that a director shall discharge his duties “in a manner the director reasonably believes to be in the best interests of the corporation.”
Directors of all corporations – including family owned businesses – owe a fiduciary duty of loyalty to the company. This duty requires a director to put the interests of the company ahead of his or her personal interest and not to divert corporate opportunities or assets for his or her own benefit. Many state statutes further address potential conflicts of interest and allow for such conflicting interest transactions as long as the director makes prior disclosure and obtains the approval of all non-interested directors or shareholders before embarking on the transaction. This statutory process protects the corporation from the potential damage of a self-interested deal by one or more directors. It also provides cover for the director when acting for his or her own benefit as long as the director makes the proper prior disclosures and receives the needed approval.
Family owned corporations are subject to the same statutory requirements regarding entity governance as non-family owned businesses. Thus, in order to fully comply with the applicable statute for the state where the business is incorporated, a family business should pay attention to all provisions that require annual or other ongoing action by the company. These include:
- Holding annual shareholder meetings
- Holding formal elections of directors at shareholder meetings,
- Documenting actions taken by the unanimous consent of the directors without a meeting
- Maintaining complete records of the company’s operations and finances
Many companies also have detailed provisions in their by-laws that spell out additional duties of directors and officers, along with shareholders’ rights and responsibilities.