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Reliance on Third-Party Advice or Information

Reliance on Third-Party Advice or Information

The duty of care requires directors to act in good faith and in a manner that they reasonably believe is in the best interest of the corporation. Directors must exercise informed business judgment and be attentive to the corporation’s affairs. In order to do so, directors are required to keep themselves informed of all material information that is reasonably available to them before making a business decision. Directors also must use care when performing their duties. Care denotes, among other things, diligence in fulfilling the responsibilities and duties attendant with the position.

A director is not required to be an expert in all corporate matters. However, when the director lacks the knowledge and skill necessary to make an informed business decision or judgment, most states acknowledge that the director may rely on advice or information provided by outside experts or counsel who have been delegated with the task of providing such expert information. A plaintiff who sues directors for breach of the duty of care must rebut the presumption that the directors properly exercised their business judgment. Defendant directors may offer evidence that they relied in good faith on others’ expertise in making business decisions. Such proof may be sufficient to invoke the business judgment rule and to defeat a claim for breach of the duty of care.

Delaware corporation law requires that directors consider all material information reasonably available when making business decisions The directors’ process is “actionable only if grossly negligent.”

The revised Model Business Corporation Act contains guidelines for reliance upon others’ business advice when the directors do not possess the knowledge necessary to make an informed and prudent business decision, as follows:

  • a director may rely on corporate employees or officers whom the director reasonably believes are reliable and competent as to the functions they perform or the information, opinions, reports, or statements they provide
  • a director may rely on legal counsel, public accountants, or other persons retained by the corporation as to matters of skills or expertise the director reasonably believes are matters within the particular person’s professional or expert competence or as to which the particular person merits confidence

State corporation statutes must be consulted to determine the types of experts that may be relied upon.

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