by Jeshua Lauka
Even in small businesses, understanding who is responsible for making business decisions in an organization is an important piece of an effective business.
Sometimes the distinction between roles/powers can be blurred. Corporations: The board, not the owners, make the decisions.
I. In corporations, there is a distinction between ownership (shareholders) and management (directors).
Under the Michigan Business Corporation Act, MCL 450.1501 “The business and affairs of a corporation shall be managed by or under the direction of its board…A director need not be a shareholder of the corporation.”
The Directors owe the owners a fiduciary duty to act in the Company’s best interest. “The directors of a private corporation stand in a fiduciary relation to its stockholders” which means that they “are bound to act in good faith for the benefit of the corporation.” Wagner Elec Corp v Hydraulic Brake Co, 269 Mich 560, 564; 257 NW 884, 886 (1934).
II. How much authority does the board have in making decisions of the company?
Answer: Virtually absolute.
“It is a well-settled rule of law that the authority of the directors is absolute when they act within the law, and that questions of policy and internal management are, in the absence of nonfeasance, misfeasance, or malfeasance, left wholly to their decision.” Ayres v Hadaway, 303 Mich 589, 594; 6 NW2d 905, 907 (1942).
III. What happens if an owner of a business questions the decision of the board of directors?
Answer: Not much. “It is only when the officers are guilty of willful abuse of their discretionary powers or of bad faith or of neglect of duty or of perversion of the purpose of the corporation or when fraud or breach of trust are involved that the court will interfere. Id.
A Court’s deference to the decisions of a board of directors is sometimes known as the “Business Judgment Rule”.
Take away:
When shareholders/owners of a corporation name a board of directors they are leaving the decision making authority to the board, and only a serious breach of fiduciary duty will make the board liable.
Otherwise, it takes a majority votes of the shareholders to remove a director, unless the bylaws provide otherwise. MCL 450.1511.
IV. Limited Liability Companies: Owners and Directors are Usually the Same.
Unlike a corporation, the owners (members) of the limited liability company manage the business of the company. MCL 450.4401.
This essentially gives ownership complete control and decision-making authority, unless the members name a “manager” in which case the Company is more similar to a corporation.
A manager must discharge its duties “in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner the manager reasonably believes to be in the best interests of the limited liability company.” MCL 450.4404.
Takeaway:
There is a reason that most small businesses in Michigan operate as LLCs – it provides limited liability, just like a corporation, but it has the added benefit of being flexible and leaving decision-making to the owners, unless the LLC is set up as a manager-managed LLC. Either way, the owners still each other owner a fiduciary duty to act in the best interest of the owners and the Company. The Business Judgment Rule Still applies.