One of the key features of the corporate legal structure is that it provides liability protection for the company’s owners, officers and directors. For legal purposes, the corporation is an independent legal entity – its own “person” – and it exists separately from the real-life people who keep the wheels turning and the money flowing. When the company gets sued, it is the company’s assets that are at risk rather than each individual owner, officer and director having his or her personal finances on the line.
However, this liability protection is not absolute. In fact, there are many circumstances in which individual shareholders, officers and directors can face personal liability in relation to their corporate duties.
Fiduciary Responsibilities of Shareholders, Officers and Directors
Shareholders, officers and directors in for-profit and non-profit entities all owe certain fiduciary obligations to the corporation. In broad terms, these obligations require that decisions be made in the corporation’s best interests, and not with competing interests or ulterior motives in mind. When a shareholder, officer or director breaches his or her fiduciary responsibilities, such action may be deemed a personal act – as opposed to an action on behalf of the company – and this can create exposure to personal liability.
Examples of actions that can constitute breaches of corporate fiduciary responsibilities include:
- Engaging in conflict-of-interest transactions
- Improper use or disclosure of inside information
- Misappropriation of corporate assets
- Misuse of corporate authority
- Neglect of corporate duties
The specifics of these examples can vary widely. For example, while the directors of a condominium or homeowners’ association could face legal action based upon an alleged failure to fairly and equally apply the governing rules of the association, officers in large publicly-traded corporations will often face shareholder lawsuits alleging regulatory shortcomings and other violations that negatively impact the performance of the company’s stock. In small privately-held companies, shareholders can face liability in disputes that involve issues ranging from financial mismanagement to operation of competing businesses.
Indemnification and Insurance
While direct personal liability in these cases is a possibility, shareholders, officers and directors will often have two layers of protection available. The first is what is known as, “indemnification.” It is commonplace for corporations to cover (i) the costs of defending against, and (ii) any settlements or judgements resulting from, lawsuits against shareholders, officers and directors in their individual capacities. The second layer of protection is insurance. Director and officer (“D&O”) policies can cover these individuals directly or reimburse the company for satisfying its indemnification obligations, while general liability coverage and certain other types of insurance may provide protection as well.
Of course, there are exceptions. For example, indemnification obligations and insurance policies will typically exclude claims based upon fraud or personal profiting. Shareholder, officer and director liability claims can quickly become extraordinarily complex, and individuals facing potential liability will benefit greatly from experienced legal representation.
Speak with a Business Litigation Attorney in Fort Lauderdale, FL
With offices in Fort Lauderdale, the attorneys at Michael L. Feinstein, P.A. represent individuals and corporate entities in litigation throughout South Florida. If you are facing a dispute and would like to discuss your options, call (954) 767-9662 or contact us online to schedule a confidential consultation today.