MBE Rules · Business Associations
Director Exculpation
Cal. Corp. Code § 204(a)(10)
The rule
Articles may eliminate director liability for duty-of-care breaches, but never for bad faith, intentional misconduct, knowing unlawful acts, improper personal benefit, or duty-of-loyalty breaches — and officers cannot be exculpated.
In plain English
Director exculpation allows a corporation's articles of incorporation to limit a director's liability for breaches of the duty of care, meaning they cannot be held liable for simple negligence. However, this protection does not extend to actions taken in bad faith, intentional misconduct, or breaches of the duty of loyalty, and it does not apply to corporate officers at all.
Worked example
A director of a corporation made a poor business decision that resulted in financial losses for the company, but the decision was made in good faith and without negligence. Under the articles of incorporation, the director is exculpated from liability for this breach of duty of care. Therefore, the director is not held liable for the losses incurred.
Memory hook
Directors can dodge duty-of-care liability, but not bad faith or loyalty breaches!
The trap
Exams often present scenarios where students must distinguish between negligence and bad faith actions, leading to confusion about the scope of exculpation. Students may mistakenly think all breaches of duty can be exculpated.
How examiners test it
This rule typically appears in questions that involve fact patterns where a director's actions are scrutinized for potential liability, often requiring students to identify the nature of the breach and the applicability of exculpation.
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