Copyright Society of Malawi

(COSOMA)
Promoting and Protecting Creativity
Kuteteza Luso

CORPORATE GOVERNANCE
WORKSHOP
4-5 September 2014
 The Principal Fiduciary Duties of Boards of
Directors
Introduction
• I want to offer an overview of the principal fiduciary
duties of boards of directors.
• I will speak mostly from a common law perspective.
• Fiduciary duties of directors were first elaborated
by common law judges, operating without any
guidance from the formal written
law.
 Copyright Society of Malawi
(COSOMA)
• Society definition, an organized group of
persons associated together for
religious, benevolent, cultural, scientific,
political, patriotic, or other purposes.
• Society/Association may also refer to a
corporate body consisting of a groups of
associated persons who usually meet
periodically because of common interests,
objectives, or profession.
• Board’s decisions are final.
• Generally, courts will uphold decisions made by the
governing board of an owners association so long
as they represent good faith efforts to further the
purposes of the common interest development, are
consistent with the development's governing
documents, and comply with public policy.
• Thus, subordination of individual property rights to
the collective judgment of the owners association
together with restrictions on the use of real
property comprise the chief attributes of owning
property in a common interest development.…
• M’Umodzi Muli Mphamvu (Let us work as a Team):
Case of leaking cabinet decision, results, MCP
Convention etc.)
 Duties of Directors (Fiduciary
duties)
• Fiduciary Duty: A duty to act for someone
else's benefit, while subordinating one's
personal interest to that of the other person.
It is the highest standard of duty implied by
law (e.g., trustee, guardian). -Black's Law
Dictionary
 Duties of Directors (Fiduciary
duties)
What are Corporate Fiduciary Duties?
• Directors and officers of corporations owe
fiduciary duties to corporate stockholders and
to the corporate business entity itself.
• Therefore, corporate directors and officers are
said to be "fiduciaries.“
 Duties of Directors (Fiduciary
duties)
What are Corporate Fiduciary Duties?

• Basically, fiduciary duties in a corporate

setting require directors to apply their best
business judgment, to act in good faith, and to
promote the best interests of the corporation.
• Because board members are entrusted with the
money and property of the association they are
held to a higher standard.
• They are deemed "fiduciaries" and have a duty to
act in the best interests of the membership.
• A homeowners association has a fiduciary
relationship with its members. (Cohen v. Kite Hill.)
• It is well settled that directors of nonprofit corporations
are fiduciaries. (Raven's Cove v. Knuppe).
• COSOMA was established in 1992 under section 41 of
the Malawi Copyright Act of 1989. (Not for profit but
members gain)
• Its main function is to promote and protect creativity.
• Board of Directors/Trustees of COSOMA are
fiduciaries who are required to exercise their powers
in accordance with the duties imposed by the
Corporations Code.
• This fiduciary relationship is governed by the
statutory standard that requires directors to exercise
due care and undivided loyalty for the interests of
the corporation. (Francis T. v. Village Green.)
 Protection from Fiduciary Duties Violations:
What is the Business Judgment Rule?
• Although directors and officers must be careful
not to violate their fiduciary duties, they can
take reasonable risks, direct corporate business
and affairs, and make innocent mistakes
without judicial scrutiny and court's second-
guessing.
• The so called "business judgment rule" is a
rebuttable presumption that directors and
officers:
 - Made decisions on an informed basis as
well as in good faith
- Honestly believing their actions to be
in corporation's and shareholders' best
interests
• In another words, unless the opposing party is
successful in rebutting the "business judgment
rule" presumption, that presumption will
protect directors and officers from personal
liability to corporation and its shareholders.
• However, the business judgment rule
presumption can be successfully rebutted by
showing that at least one of fiduciary duties
had been breached.
• So, what are these different fiduciary duties?
 Three Broad Duties
• Upon their election to the board of a common
interest development, directors become
fiduciaries with powers to act on behalf of the
association.
• As fiduciaries, directors are held to a higher
standard of conduct and have three primary
duties:
 Classifying Fiduciary Duties: What are the
Three Basic Types of Fiduciary Duties?
• At least the laws of Delaware, where many
businesses incorporate, seem to point out
three basic fiduciary duties. These duties are
as follows:
 Classifying Fiduciary Duties: What are the
Three Basic Types of Fiduciary Duties?
1) Duty of Care – directors and officers must use
care and be diligent when making decisions on
behalf of the corporation and its shareholders
(who are the true owners of the corporation).
• Directors and officers meet their duty of care
if they act:
 - In good faith
- With the care of a reasonable person in
like position
- With reasonable belief their decisions
are in best interest of the corporation
• These standards may sound like the ones
described under the business judgment rule.
However, some Delaware case law points that
even a careless, negligent director or officer
may be protected.
• This is because to violate a duty of care,
director or officer may have to be "grossly
negligent," rather than simply negligent or
careless.
2) Duty of Loyalty – directors and officers must
have an undivided duty of loyalty to the
corporation and shareholders.
• In another words, they must put the interests
of shareholders and the corporation above
their own interests.
• To understand the duty of loyalty, let us
illustrate several ways it in which can be
violated:
 - Gaining secret profit belonging to
corporation
- Competing with corporation
- Seizing corporate opportunity
- Self-dealing with corporation
Case of Ministry of Tourism PS and officials
• The above situations often arise in conflicted
or related-party transaction settings.
• In another words, these transactions do not
involve free market, arms length dealing.
• The key is disclosure, as well as appropriate
approval from other disinterested (i.e.,
without personal stake in transaction)
directors and shareholders.
• Director should disclose suspicious
transaction and ask others (i.e., shareholders
and directors) for permission to conduct it.
3) Duty of Good Faith – while under Delaware
law, it is not clear whether this is a
freestanding fiduciary duty or a part of duty of
loyalty, the duty of good faith may be
understood as "conscious disregard" or
"intentional dereliction of duty."
• Basically, courts may use this duty as an
alternative means for finding director liable.
• Without getting bogged down in legal
theories, what's important is that a director
who escapes liability for duty of care violation
may still be on the hook for his lack of good
faith.
• Basically, courts may use this duty as an
alternative means for finding director liable.