Officers and directors of a corporation are the company’s management tier. Directors take part in managing high-level business matters whereas officers oversee the day-to-day operation of the business. They may be shareholders, employees of the company, appointed individuals being paid for consulting services, or any combination of these categories.
A key feature of a corporation is the limited liability protection that incorporation can provide. The general rule is that officers, directors, and shareholders are insulated from personal liability arising from their activities performed in the scope of their corporate duties or from their ownership interest in the company. When a corporation is formed under state law, it acts as an independent legal entity and exists completely separate from any officers, directors, or shareholders. Articles of incorporation will be filed with the state that allows the corporation to legally exist and have similar rights and privileges that an individual may have. Corporations approved by the state can go on to sell goods or services, own property, pay income taxes, file lawsuits, and more all under the business entity name. Corporations must be sure, however, to timely file required annual reports and pay annual fees and taxes to maintain the corporation’s registration in good standing with the state. If a corporation is suspended from doing business, the corporation’s officers and directors will be exposed to personal liability.
Because a corporation is separate from the officers, directors, and shareholders, they are also not generally liable for corporate obligations. For example, if a corporate officer takes out a loan in the company’s name and the corporation defaults on that loan, the lender cannot file suit against the officer individually to recover the loss. The lender would only be able to recover the loss from the company’s assets. Even if an officer or director induces the corporation to violate a contractual obligation, an officer or director will not be held liable if the individual acted in good faith and believed that what he or she did was in the corporation’s best interest. They will be liable for corporate obligations, however, if the officer or director is found to have used the corporate entity as a sham to perpetrate a fraud, avoid personal liability, avoid the effect of a statute, or in a few other exceptional situations.
Further, officers or directors may be held individually liable for a corporation’s negligence or intentional torts if the officer or director knowingly participated in the conduct, had actual or constructive knowledge of the conduct and assented to it, or owed the injured party an independent duty of care. Such actions may include corporate officers lying on government documentation, being complicit in lying to shareholders or the public, stealing corporate resources, embezzlement, sexual harassment, and other such illegal actions. Further, officers and directors who participate in or authorize the commission of wrongful acts that are prohibited by statute, even if the acts are done on behalf of the corporation, may be held personally liable.
Officers and directors may also be liable to the corporation or its shareholders. Because they can be incredibly influential in the direction and operation of a company, officers and directors must be held accountable to the corporation for their actions. For example, Texas law makes officers and directors liable to the corporation if they approve a wrongful distribution of or misuse of corporate assets. Although state law allows a corporation to limit an officer’s or director’s liability to the corporation and its shareholders in articles of incorporation or bylaws, it does not authorize the elimination or limitation of the liability of a governing person to the extent they are found liable breaching their fiduciary duties of loyalty, care, and good faith—which require officers and directors to act in the company’s best interest—or for intentional misconduct. In such cases, the corporation may assert claims against the officer or director, or the shareholders may assert the corporation’s claims standing in the corporation’s shoes in a derivative action.
Many companies choose to take out insurance policies for their corporate officers and directors in the hopes that it will cover any detrimental events that could negatively affect the company. Illegal acts, however, are not covered by such an insurance policy; and, officers that participate in such actions are not shielded from facing civil and criminal penalties.
The lawyers a Burford Perry LLP have extensive experience both defending officers and directors from liability claims and pursuing claims for companies or shareholders. This gives us insight into how the other side will approach a claim and how to best pursue resolution. If you are dealing with a director or officer liability claim or suspect an officer or director has acted for his or her own interest, Contact Burford Perry LLP today to schedule a confidential consultation to discuss your case.