State Corporate Law: Legal Enforcement
.Fiduciary duties are enforced by judicial intervention:
1.Injunction: court order that the board refrain from a
specific action.
2.Damages: requirement that the board pay for losses
sustained.
.Under the “business judgment rule,” the court will not
second-guess a board’s decision if:
1.The board followed reasonable process
2.The board took into account key relevant facts
3.The board made the decision “in good faith”
.“Good faith” requires that the board act without conflicts of
interest and not turn a blind eye to issues for which is it
responsible.
Federal Securities Laws: Legal Obligations
.Under federal securities laws, directors have a legal obligation
to disclose information to the public.
.Disclosure requirements are established by the Securities and
Exchange Commission.
.In general, the company is required to disclose all “material
information” – information that an investor would consider
important in the evaluation of an investment decision.
.The board relies on external and internal auditors to ensure
that material information is adequately disclosed.
Federal Securities Law: Legal Enforcement
.Securities laws are enforced through private lawsuits and SEC
actions.
.Private lawsuits are led by investors who claim to have been
harmed by a violation.
.In order to be found in violation of securities law, the court
must find that a disclosure to the public contained a material
misstatement or the omission of material information, and
that the misstatement or omission was the cause of loss.
.A director cannot be held liable unless the misstatement or
omission was intentional or the result of recklessness.
GL SILVER
