What is the consequence of fraud or misrepresentation by management regarding fiduciary protections?

• A. Fraudulent actions are ignored if profits are high.
• B. The business judgment rule fully shields managers even in fraud scenarios.
• C. Fraud or misrepresentation may lead to liability for directors and the company.
• D. Only investors are affected.

Answer: (C)

The central idea is that fiduciary protections do not excuse fraud. Directors and managers owe duties of loyalty and care, and when they engage in fraud or misrepresentation, those duties are breached. The business judgment rule provides a defense for directors making ordinary business decisions in good faith with proper processes, but it does not shield fraudulent or misleading conduct. When fraud occurs, directors and the company can be held liable for breaches of fiduciary duties, and those harmed—such as shareholders, investors, or other third parties—can pursue damages or enforce remedies. Regulators may also step in for securities-law violations. So, the consequence is liability for both the directors and the company.