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Why Directors Must Dissent From Objectionable Board Decisions

There are several options when it comes to selecting a legal structure for a small business. These include sole proprietorships, partnerships, limited liability companies (LLCs), nonprofit corporations, and corporations. Corporations tend to be a popular choice. This is because they provide the owners with protection from personal liability, but in limited cases, members of a corporation can be held liable for corporate acts or debts.

From small companies to large corporations, the decisions made by the company's board can impact the business's success. Directors, as key members of the board, have a significant role in these decisions. Their choices can affect business owners and stakeholders. They can also set the course of the company's future.

This article explores why it's crucial for directors to dissent from objectionable board decisions. Understanding this is important for everyone involved in a business. Entrepreneurs, senior management, and even family members who might be part of the business structure should be aware.

What Role Do Directors Play in a Corporation?

The typical corporate structure includes directors, officers, and shareholders. Whether it's a small business or a large public company, directors have a critical role in shaping the business's future. They are part of the company's board, responsible for strategic planning and major business decisions. This includes everything from approving business plans to overseeing corporate governance.

Directors may include corporate officers like the CEO and CFO. These directors are chosen to represent the interests of the company and its stakeholders. Directors do not make day-to-day decisions, but instead appoint officers. These officers oversee and handle the day-to-day operations of a business. They attend regular board meetings and contribute to annual meetings. They are involved in decision-making processes. 

In both private companies and public companies, directors' contributions are essential. They help align the business needs with the company's long-term goals.

Directors are generally protected from being held liable at a personal level. This means they are not responsible for the corporation's debts and legal judgments, but there are instances when they can be held liable for corporate actions. Holding individuals liable for the actions of a corporation is generally known as piercing the corporate veil. If the board of directors makes an illegal or objectionable decision, there is a way for directors to protect themselves from liability by dissenting from the board's decision.

Reasons Directors Should Dissent Certain Decisions

Directors have a legal responsibility to act in the best interests of the company and its shareholders. They also have a fiduciary duty which requires them to dissent from certain board decisions. This is true when these decisions conflict with the company's interests. Reasons for dissenting can include:

  • Conflicts of Interest: If a decision benefits a director's personal interests or those of family members more than the company
  • Violating Bylaws or Articles of Incorporation: Directors must ensure directors follow the company's foundational documents
  • Harmful to Business Needs: If a decision goes against the company's strategic plans or harms its prospects
  • Legal and Ethical Concerns: Decisions that could put the company at legal risk or are unethical should be opposed
  • Advisory Board Recommendations: Outside directors or advisory boards provide insights that go against the board's views

By dissenting, directors uphold their fiduciary responsibility. They help protect the company and its stakeholders.

Getting Legal Help With Corporations

There are many legal requirements to form a corporation. There also are corporate formalities that must be followed to maintain its corporate status. It's important to follow all the requirements. Failure to do so could expose the owners to liability for the corporation's actions.

If you have questions about the role of directors, you may want to consult with an experienced business and commercial attorney.

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