General
Principles and Information
Re:
Director and Officer Liability Info. Checklist
I.
General Standard:
With some exceptions, the general legal standard of
care for business actors and agents is “prudence.” In this context “prudence” means to act as an
ordinary prudent person would act under the circumstances. But, this standard
can be misleading because, at law, prudent people arguably do not make common
mistakes, like combing their hair or changing the radio dial while driving, let
alone sending texts. So, the prudent
standard can be a relatively high standard in its application.
Officers and directors are commonly
protected by the “Business Judgment Rule” which holds them harmless from liability
as long as certain conditions are met. These are:
A. Loyalty
Standard:
1. Acting for the benefit of
the company,
(a) reasonable and
(b) good faith belief
2. loyalty; fiduciary
standard,
(a) no self-dealing or
conflict of interest;
(b) acting without self-interest in the transaction or
(i) the conflict of interest is disclosed and approved
(ii) not including the vote of the interested officer
or director.
B. Competence Standard:
1. Due diligence (not negligent, i.e. not fail to act
as a reasonably prudent officer or director would)
2. Sarbanes-Oxley – Certification of Financial
Statements and criminal penalties for alteration or concealment of financial
records, etc.
3. Disclosing company as the principal and self as the
agent (undisclosed principal -> agent is principal and liable, e.g. business
card and letterhead mistake)
4. Ultra Vires Acts: Acting beyond reasonable
authority. Act subject to higher authority, e.g. Board of Directors approval?
(i)
standard resolution procedure
5. Defective Contracts – fail to sign as officer ->
possible personal liability
6. Pre-corporate acts – promoter liability.
7. Personal guarantee.
C. Misconduct
Standard:
1. Misappropriation: theft, conversion, improper
use of company property including intellectual property
2. Self-Dealing - conflict of interest, e.g. breach of
corporate opportunity doctrine (torts)
3. Crimes,
against company or others, e.g. embezzlement, or fraud (personal liability for
torts, like fraud, tortious interference with contracts or business expectancy)
D. Statutory
Liability:
1. Personal liability for unpaid 941 payroll taxes,
sales taxes, etc.
2. Corp officer responsibility for compliance
with OSHA, FDA, other standards. US v.
Park, 421 U.S. 658 (1975) (President and CEO personally liable for failure
to rid food warehouse of rats even though other, local employees in
organization were more directly accountable and responsible for the
problem.)
II. General information:
This memo is intended to provide
general information only and not legal advice on any particular legal issue,
because, among other reasons, the change of one or two facts can change the
outcome of the case. Also, in defending corporate officers or directors in Arizona, there is some present case law that would support a “gross negligence
standard,” in which case officer or director liability could be more difficult
to establish.
***
The Law Offices of Donald W. Hudspeth, P.C. – Business
Law & Commercial Litigation
www.AZBUSLAW.com – “The
Business of Our Firm is Business” – TheFirm@azbuslaw.com
