A more thorough explanation:

The duty of care is a legal obligation that requires directors and officers of a corporation to make decisions that are in the best interests of the corporation. This fiduciary duty is owed by directors and officers to the corporation, not to its stakeholders or society at large.

According to the American Law Institute’s Principles of Corporate Governance, the duty of care requires corporate directors and officers to:

• Perform their functions in good faith
• Make decisions that they reasonably believe to be in the best interests of the corporation
• Exercise the care that an ordinarily prudent person would reasonably be expected to exercise in a similar position and under similar circumstances (negligence standard)

Courts analyze the duty of care by examining the processes by which directors and officers made decisions. If the court finds bad faith, gross negligence, or bad processes, the court will subject the directors’ decision to judicial review to analyze whether there was a breach of duty of care.

Corporations can limit their exposure to the duty of care through indemnification, directors and officers insurance (D&O insurance), and waivers of liability. Indemnification allows corporations to reimburse any agent, employee, director, or officer for reasonable expenses for losses of any sort arising from any actual or threatened judicial proceeding or investigation so long as the losses result from actions undertaken on behalf of the corporation in good faith and do not arise from a criminal conviction. D&O insurance allows corporations to insure fiduciaries for anything (including crime and bad faith). Waivers of liability can limit and/or extend the Board of Directors’ liability through the corporation’s charter.

Suppose a corporation is considering a merger with another company. The duty of care requires the directors and officers to carefully consider the potential benefits and risks of the merger and make a decision that is in the best interests of the corporation. If the directors and officers fail to conduct due diligence or ignore important information, they may be in breach of their duty of care.

For example, if the directors and officers approve the merger without reviewing the financial statements of the other company or without considering the potential impact on the corporation's employees, shareholders, or customers, they may be liable for any losses that result from the merger.

However, if the directors and officers conduct a thorough review of the merger and make a decision that is in the best interests of the corporation, they will likely not be held liable for any losses that result from the merger.