A career as an officer, director, or shareholder of a corporation brings great opportunity to be a lauded visionary, strategic thinker, and the leader of a profitable venture, with accompanying compensation. That being said, this position comes with great responsibility and the risk of personal liability is real even when proper liability insurance is in place. While there is no bright-line rule regarding the personal liability of corporate directors, officers, and shareholders, there are a number of situations in which these individuals can be held liable for misconduct.
California law grants directors and officers of a corporation principal authority over the organization’s ordinary business affairs. In addition, state law identifies specific duties that are owed to the shareholders as well as the enterprise itself.
Under the duty of loyalty, for example, officers and directors are obligated to always act in the best interest of the corporation and its shareholders. A breach of this duty occurs when an officer or director has a conflict and fails to disclose material information from the organization. Officers and directors also owe a duty of care to the organization, meaning they must act in good faith and with fair dealing in the best interest of the corporation and its shareholders using a level of care that would be used by an ordinarily prudent person similarly situated.
While it is true that the doctrine of the “business judgment rule” exists as a corporate weapon to shield officers and directors, it is not a failsafe insulation from personal liability. California courts have consistently held that intentional misconduct will result in personal liability. In the same manner, if a corporate officer or director authorizes, directs, or substantially participates in wrongful conduct, personal liability will attach even if the actions were undertaken by the corporation resulting in joint liability. Likewise, when an officer or director engages in fraud, personal liability results.
Liability for a corporate officer or director is much less likely to be found by a California court if the harm is caused by negligence rather than intentional conduct. It is often the exception and not the rule when a corporate officer or director purposely engages in damaging conduct. Nonetheless, below are a few steps officers and directors can take in order to help prevent personal exposure:
The skilled business litigation attorneys at Garcia & Gurney, ALC proudly advise employers in Pleasanton and throughout the Bay Area on several aspects of business law. This full-service law firm assists businesses of all sizes create and implement best practices and policies to help ensure the organization is complying with the numerous state and federal laws that govern California businesses. The firm offers different rate structures and can provide consultations in Spanish. Call (925) 468-0400 today to schedule your initial consultation.
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