Mitch is a director and officer of Numero Uno, Inc. Mitch makes a marketing deci
ID: 470147 • Letter: M
Question
Mitch is a director and officer of Numero Uno, Inc. Mitch makes a marketing decision that results in a dramatic decrease in profits for Numero Uno and its shareholders. The shareholders accuse Mitch of breaching his fiduciary duty to the corporation. What is Mitch's best defense against this accusation? Later, the Numero Uno board considers a resolution for the firm to compete with One-of-a-Kind Corporation. Mitch is a director and shareholder of One-of-a-Kind. What is Mitch's responsibility in this situation?
Explanation / Answer
The best defense in this case is the business judgment rule. Under this rule, the directors of the organization are not liable to any kind of loses which take place due to false business decisions as long as the decisions or the acts are made in the good faith, which he considers to be the best, by keeping the company's best interests in mind. The business judgment law further emphasizes on the fact that not every decision taken by the directors or the officers need not be successful. It supports the fact that it is unfair to expect those managing the company take perfect decisions all the time. So, Mitch's being accused in this case is not a negative act in the eyes of the law.
Being a director of a company and competing against the corporation where Mitch is a director and a stakeholder is a fix situation for Mitch. Because a director cannot support a business which competes directly with the business in which he holds a director position. Mitch is the director and stakeholder of One-of-a-Kind corporation. Holding a director position in Numero Uno gives him responsibility to serve the boards of both the business. In this scenario, if one board in which he is serving as a director competes with the other organization where he serves director, then it is the director's fiduciary duty to disclose the conflict of interest. If the conflict is not in a position to get resolved, then the most likely situation will be that the director has to resign from one of the boards. He cannot serve two boards which compete against each other.