A Corporation’s Directors Could be Liable for Monetary Damages

A corporation’s directors are essential to the operation of the corporation.

The corporation cannot do anything unless the directors take appropriate action.

Corporate law requires that a corporation have a board of directors.

So you are asked to become a corporate director or you are director of your own corporation. What could go wrong, right?

If the corporation ends up running out of money or racking up debt or starts failing to meet its legal or contractual obligations, guess who can be held responsible for all of that?

You, as the director, can be held legally responsible for money damages arising from the wrong actions of the corporation.

And if you are a shareholder and director this means that your actions as a director can end up making you personally liable for the corporation’s debts even if you are insulated from personal liability as a shareholder.

With such responsibility why would anyone want to be a director of a corporation?

To protect directors, and encourage people to take on such duties, the law offers some limits on the personal liability of a director for money damages.

But for a director to have the most protection under the law, the articles of incorporation in California must contain a simple clause.

The articles must state certain language (under California law) about limiting the directors’ liability “to the fullest extent permissible.”  If this clause is included, the fullest protection for directors is triggered.

Fullest protection is extensive so long as the alleged wrongdoing by the director is not intentional.

In other words, the fullest protection under law does not protect a director for certain bad actions.

For example, if the director acted with the intention to harm the corporation or knew his or her actions were against the law, the fullest protection does not apply and the director can still be held liable.

If the director acted without goof faith, or in a way that the director believed was not in the best interests of the corporation or its shareholders, the fullest protection also does not apply.

Or let’s say there was a corporate transaction approved by the director that gives that director an improper benefit, there would then be no protection for such director.

Suppose a director is aware of a risk of serious injury to the corporation or shareholders from the director’s actions but recklessly disregards the corporation or shareholders and takes such action anyway.

Here too the director’s actions are not protected by the fullest protections from liability.

Then there are some directors who are too busy to take care of their duties as directors.

Or they just don’t care about being an active director.

If such directors make it a habit to not participate as a director, and there is no excuse for such inattention, they have effectively abandoned their obligations.

Such directors will not be protected from personal liability if something bad happens to the corporation.

They won’t be protected even if the articles of incorporation contain the magic language giving directors the fullest protection.

So, if you are thinking about becoming a director, it is important to check the articles of incorporation to make sure they give you the fullest protection under law.

But even with the fullest protection you will still be personally liable if you don’t always act in good faith or don’t always discharge your duties to the corporation and its shareholders in their best interest and not your own.

References: California Corporations Code sections 204(a)(10) and 204.5.

This discussion is not legal advice, a solicitation of you as a client, nor the engaging in the practice of law in any jurisdiction.

This discussion is merely for information/education and should not be relied upon for legal advice by anyone because the facts discussed may be different from your own situation.  If you need legal advice, consult a qualified attorney.

For more information please visit my website at www.palacioslawoffice.com.


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About Elio Palacios, Jr.

Attorney Elio Palacios, Jr., represents individuals, corporations, entrepreneurs, small businesses, startups and early stage businesses, physicians, dentists, and healthcare businesses in corporate, business and commercial transactions and litigation. He also counsels employers and individuals on visa, immigration and naturalization matters. Visit www.PalaciosLawOffice.com to learn more.
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