Chapter 18, Problem 1RE

Summary Introduction

Case summary: Person DB was a director in company FBF which owned a string of fitness club in Mexico. DB owned 15 percent of the total stock in the company and was also working as a tanning technician at one of the fitness clubs. According to the finance report, company FBF was facing financial loss. Person ML discussed terminating the tanning operation. Person DP who was one of shareholders disclosed that person DB owned stock in the company S from which FBF purchased the tanning equipment. DB and MV owning 37 percent of FBF and also holding shares of company S, voted to replace ML from the board of directors.

To find: The duty of person DB as a director to company FBF

Explanation of Solution

Person DB owes ethical and legal duties as a director of company FBF. Person DB is in a fiduciary relationship to corporations and it is his duty to remain loyal and to act in good faith to the company.

In the above case, person DB owes a duty to disclose to company FBF about his shares in company S from where FBF purchases its tanning equipment. The directors are considered to be fiduciaries of the company and as a director they owe to the company the duty of loyalty, the duty of trust, and duty of care. It is expected from the directors that they will show a high care, diligence or skill, and will act in good faith for the development of the company. The directors will try to avoid conflict of interest. The relationship between the company and the directors is one kind of trust.