Liability Issues for Officers and Directors
Liability can exist for officers and directors when they cause financial harm to the corporation, act solely on their own behalf and to the detriment of the corporation, or commit a crime or wrongful act. In addition, certain acts may subject an officer or director to personal liability.
Personal Liability of Officers and Directors
Officers and directors may be personally liable for financial harm caused to the corporation if they:
- Breach their duty of care to the corporation
- Breach their duty of loyalty to the corporation
- Misappropriate a corporate asset for personal use or use by another business
- Commingle personal and business assets
- Fail to disclose potential or actual conflicts of interest
Can a corporation’s officer be held personally liable?
A corporation’s officer might serve on the board of directors or in the management team. An officer can be a shareholder, a firm employee, someone appointed to the board of directors who may or may not be compensated for their services as an officer, or someone who juggles multiple duties to the corporation. The facts of the case and the officer’s formal relationship to the corporation determine an officer’s personal culpability for corporate activities.
Limitation of Liability
One of the most important characteristics of a corporation is the limited liability protection it provides. A corporation is a legal entity that exists independently of its stockholders founded under state law. Limited liability shields shareholders, directors, officers, and employees from personal liability for corporate debts and activities performed in the company’s name. A corporation’s officer, whether they are also a shareholder, director, or employee, cannot typically be held personally accountable.
Officer/Director Liability Quick Links
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Illegal Practices
Of course, if a director commits illegal acts for the organization, that officer or director may find themselves personally accountable. Personal Liability is not only the case for unlawful acts but also acts of negligence. Officers who are complicit in deceiving the public, lying to the government, defrauding investors, stealing corporate resources, embezzling, sexually harassing others, or engaging in any other illegal activity may face criminal or civil penalties as well as jail time.
Fiduciary Obligations
A Board of Directors and its officers have a legal obligation to operate in the best interests of shareholders and maximize profits. Accordingly, while an Officer of the Board of Directors has limited liability for actions taken on behalf of the corporation, if they violate their fiduciary duties and engage in self-dealing or otherwise prioritizes their (or a related party’s) interests over the corporation’s, the officer may be held personally liable.
Piercing The Corporate Veil
If a court concludes that a corporation is only a shell allowing the people involved to take advantage of creditors, the court can disregard the company’s limited liability protection. This action by the court is “Piercing the Corporate Veil.” The court can hold officers, directors, shareholders, or workers personally accountable if they treat the corporation like a piggy bank, mixing personal and corporate cash and failing to follow the formalities expected of a corporation.
Good Standing
A corporation is formed in the state where its articles of incorporation are filed. To keep a corporation’s registration in good standing, some states require businesses to file an annual report or pay a yearly fee. The state may suspend the corporation’s ability to conduct business in the state if these requirements are not paid on time. In addition, if the corporation’s state registration expires, the individuals involved may face personal culpability if the company is sued.
Indemnification of Officers and Directors
Indemnification of officers and directors means that the corporation will reimburse them for expenses incurred and amounts paid in defending claims brought against them for actions taken on behalf of the corporation.
States have recognized that without some method to limit the liability of officers and directors for claims brought against them, it would be difficult for corporations to find anyone willing to serve as officers or directors. As a result, most state corporation statutes now contain provisions regarding indemnification and insurance for officers and directors. However, the provisions vary as to where and when indemnification will apply. Make sure to check your own state’s law on this issue.
You can include a provision for the indemnification of officers and directors in your bylaws.
Directors’ and Officers’ Insurance
Insurance policies can cover matters that cannot be indemnified under state law or in instances where the corporation does not have the financial resources to pay for the indemnification. Most state corporation statutes allow corporations to purchase insurance to cover matters resulting from acts taken by officers and directors. Florida Statutes examine these issues exhaustively. Directors’ and Officers’ Insurance is separate from and in addition to the general liability insurance you purchase for your corporation — it is generally relatively expensive.
The cost for directors’ and officers’ insurance has gone up dramatically, and the exclusions for coverage have also increased. Therefore, it’s a good idea to speak with an insurance broker with your attorney regarding your corporation’s insurance needs and requirements.
Be sure to review our blog post, “A Check List For Director and Officer Insurance.
