What are the Rights & Duties of Directors + Officers of a California Corporation?

⚖️ Rights of Directors + Officers

Fair Compensation: A Director or Officer is entitled to fair compensation, the rate of which the Board of directors determines.

Note: It is not a conflict of interest for the Board to set reasonable director compensation in good faith unless the articles or by-laws state otherwise. If excessive itis a waste of corporate assets and a breach of the Duty of Loyalty.


✅ Mandatory indemnification for expenses incurred:

1️⃣ On behalf of the Corporation; and for

2️⃣ Expenses incurred if they prevail in a proceeding brought against them by the Corporation.

 Discretionary indemnification where the director or officer is unsuccessful in proceedings brought against them by the Corporation if they:

1️⃣ Acted in good faith; and

2️⃣ They believed their actions were in the best interest of the Corporation;

❌ Unless they are liable due to an improper financial benefit.

Inspection: A Director or Officer has a right to a reasonable inspection of corporate records or facilities.

⚖️ Duties of Directors + Officers

1️⃣ Duty of Care [Burden on the Corporation Plaintiff]

State the Duty of Care standard: A Director or Officer owes the Corporation a duty of care.

They must act in good faith and do what a prudent person would do with regard to their own business.

Nonfeasance: The Director does nothing.

Apply the standard: A prudent person would attend some meetings and so some work. If the Director never did anything, they have breached the duty of care.

Liable only if the breach caused a loss to the Corporation.

Misfeasance: The Board does something that hurts the Corporation - so causation in these cases is clear.

Apply the standard: Here, the Directors' action caused a loss to the Corporation and was arguably imprudent given that it turned out badly BUT a Director is not liable if they meet the Business Judgment Rule (BJR).

⚖️ The Business Judgment Rule

A Court will not second guess a business decision if it was:

1️⃣ Informed;

2️⃣ Made in Good Faith;

3️⃣ Without Conflicts of Interest; and

4️⃣ Had a Rational Basis.

So, are the Directors' liable here for breach of the duty of care?

It depends on the facts.

✅ Was the Board reasonably informed?

✅ Did it do appropriate homework before making the decision (analyze information, deliberate)?

✅ Did it act in good faith, free of self-interest, and with the belief that the decision was in the best interest of the Corporation?

If so, the Directors' are not liable, despite the poor substantive outcome of the decision, because the BJR recognizes that a Director is not a guarantor of success.

Reliance on others: It is not unreasonable for a Director to rely on information from officers, legal counsel, committees, etc. the Director reasonably believes to be reliable and competent.

💡Point of comparison: This ability to rely on the information from others is in direct contrast to the position of Directors in Australia, who must exercise their own independent judgment + cannot rely blindly on the advice/information of officers/experts.

For a more detailed discussion please refer to my blog article: The Business Judgment Rule for Directors [Australia v. U.S.A.]

2️⃣ Duty of Loyalty [Burden on the Defendant Director]

❌ The BJR does not apply, it's about conflict, not business judgment.

State the Duty of Loyalty standard: A Director or Officer owes the Corporation a duty of loyalty.

They must act in good faith and with a reasonable belief that what they do is in the corporation's best interest.

❌ Conflict of Interest (self-dealing) = Interested Director Transaction

A Director or Officer has a conflict when they (or a Corporation they own or have a relationship with, or their family member):

1️⃣ Enter into a contract with the Corporation; or

2️⃣ Have a beneficial financial interest in a contract.

Self-dealing contracts are presumed unfair + voidable.

The Interested Director Transaction will be set aside (or the Director will be liable in damages) UNLESS the Director shows the conflict was cured.

The Conflict can be shown to be cured if:

✅ Authorised by disinterested directors after material disclosure; or

✅ Approved by a majority of disinterested shareholders after material disclosure; and

✅ The transaction was fair to the Corporation when entered into.

Even if the deal is approved by an appropriate group:

Some Courts always require a showing of fairness even if disinterested directors/shareholders approve it.

❌ Usurping a Corporate Opportunity (Expectancy)

A Director or Officer may not personally act on a business opportunity without first offering it to the Corporation where the Corporation would expect to be presented the opportunity.

What opportunities would the Corporation expect to be presented with?

⚖️ Some say it's something in the Corporations line of business.

There are other tests to through in:

⚖️ Something the Corporation has an contractual or property right interest or expectancy (tentative claim); or

⚖️ Something the Director or officer found on Co. time or with Co. resources.

Q: Is the Corporation's financial inability to pay for the opportunity a defence?

A: Probably not.

The director or officer may take the opportunity only after:

✅ Good faith rejection of the opportunity by the Corporation if there was full disclosure of all material facts to a disinterested board majority.

Remedy: If the Director or Officer usurps a corporate opportunity, then the Corporation may compel that Director or Officer to:

1️⃣ Turn over the opportunity at the Director's cost; or

2️⃣ Disgorge profits (constructive trust equitable restitution theory).

❌ Competing Ventures

A Director or Officer may not unfairly compete with the Corporation.

Remedy: If the Director or Officer unfairly competes, then the Corporation may compel that Director or Officer to:

1️⃣ Turn over the relevant competing opportunity/opportunities; or

2️⃣ Disgorge profits (constructive trust equitable restitution theory).

3️⃣ Duty to Disclose

Directors and Officers have a duty to disclose all material information relevant to the Corporation to Board members.


This FAQ was prepared by James D. Ford GAICD | Principal Solicitor, Blue Ocean Law Group℠.

Important Notice:

This FAQ is intended for general interest + information only.

It is not legal advice, nor should it be relied upon or used as such.

We recommend you always consult a lawyer for legal advice specifically tailored to your needs & circumstances.