Shareholder Liability of Directors and Officers

Running a company is risky. Directors and executives must select among these risks to determine the company’s best course of action. When anything goes wrong, individuals who have been harmed – in this example, stockholders – seek to blame and sue to recoup part of their losses. The issue with a business suing its directors is that the directors usually decide whether to sue. Directors will not sue themselves. Hence, the legislation created a mechanism for shareholders to sue officials or directors on behalf of a company. Shareholder derivative actions are so named because the stockholders are representing the company in the litigation.

Who wants to be a board or officer if every choice taken puts their fortune or position at risk? Accordingly, corporate law establishes a structure where directors and officers are restricted in their responsibility so corporate America can maintain a healthy group of executives.

The law stipulates that shareholders, workers, and the general public cannot criticize a company’s directors and officers’ business judgment. The rule recognizes that risk is part of business and that managers must be free to choose the best route for their organization. Ultimately, the rule exempts individual directors or officers from civil or criminal culpability if they acted without deceiving or misleading the corporation and based their decision on good business reasons and appropriate research. For now, bear in mind the business judgment guideline while evaluating corporate managers’ activities.

Shareholders are Liable for their Actions
Shareholders are in a similar condition as executives and directors. Companies seeking funding would have empty meeting rooms if prospective investors knew they might be solely liable for their investment.

Shareholders’ liability is considerably lower than directors’ and officers’. Investors have chosen managers as their agents to increase or at least safeguard their investment. No fiduciary obligation exists between shareholders and the company. Because shareholders have minimal control over the corporation’s decision-making processes, their culpability is limited.

It does not imply that stockholders are entirely free of obligation. Instead, the court has addressed certain kinds of acts when imposing personal responsibility on shareholders. For example, a shareholder pays far less than the entire stock value offered to her after a share issue. Similarly, a stakeholder who gets an unlawful payout (one that causes the firm to go bankrupt) is personally accountable for the payment.

While different situations occur, these two are the most common in legal practice. The common thread in all of these instances should be evident. People shall examine shareholder liability for company debts later in the course.

Shareholder Liability of Directors and Officers

Corporation Liability
Historically, it was believed that a corporation’s obligations restrict to civil. However, recent occurrences, notably the Enron fiasco and the subsequent collapse and criminal culpability of Arthur Andersen prove this is not the case. Corporations have traditionally been accountable for commitments and obligations entered into by directors, officers, and employees. Notably, contracts carried before incorporation may be the company’s duty. Pre-incorporation contracts entered into it by the company’s promoters or owners become the company’s duty when accepted by the company or when the corporate accepts the advantages related to the contract.

The promoter who signed the contract as the representative of the future company is often personally accountable. However, if the parties to a contract agree to look exclusively to the company for responsibility, then the incorporator may be exempt from personal liability.

In general, a firm is not responsible for deliberate torts committed by its supervisors, but it may be answerable for unintentional torts. For an intentional tort committed by an employee, the company is responsible if the directors knew or should have known about it.

However, unless the business sanctioned the employee’s actions, a corporation is not responsible for punitive damages.

Shareholder Liability of Directors and Officers
Running a company is risky. Directors and executives must select among these risks to determine the company’s best course of action. When anything goes wrong, individuals who have been harmed – in this example, stockholders – seek to blame and sue to recoup part of their losses. The issue with a business suing its directors is that the directors usually decide whether to sue. Directors will not sue themselves. Hence, the legislation created a mechanism for shareholders to sue officials or directors on behalf of a company. Shareholder derivative actions are so named because the stockholders are representing the company in the litigation.

Who wants to be a board or officer if every choice taken puts their fortune or position at risk? Accordingly, corporate law establishes a structure where directors and officers are restricted in their responsibility so corporate America can maintain a healthy group of executives.

The law stipulates that shareholders, workers, and the general public cannot criticize a company’s directors and officers’ business judgment. The rule recognizes that risk is part of business and that managers must be free to choose the best route for their organization. Ultimately, the rule exempts individual directors or officers from civil or criminal culpability if they acted without deceiving or misleading the corporation and based their decision on good business reasons and appropriate research. For now, bear in mind the business judgment guideline while evaluating corporate managers’ activities.

Shareholders are Liable for their Actions
Shareholders are in a similar condition as executives and directors. Companies seeking funding would have empty meeting rooms if prospective investors knew they might be solely liable for their investment.

Shareholders’ liability is considerably lower than directors’ and officers’. Investors have chosen managers as their agents to increase or at least safeguard their investment. No fiduciary obligation exists between shareholders and the company. Because shareholders have minimal control over the corporation’s decision-making processes, their culpability is limited.

It does not imply that stockholders are entirely free of obligation. Instead, the court has addressed certain kinds of acts when imposing personal responsibility on shareholders. For example, a shareholder pays far less than the entire stock value offered to her after a share issue. Similarly, a stakeholder who gets an unlawful payout (one that causes the firm to go bankrupt) is personally accountable for the payment.

While different situations occur, these two are the most common in legal practice. The common thread in all of these instances should be evident. People shall examine shareholder liability for company debts later in the course.