Directors and Personal Liability Issues

Directors, and officers and others, may be specifically entitled to indemnification by the company for their activities in their roles with the company. However, in order for the protection to apply, the director must be acting within the scope of their authority. To the extent a director does something outside of what the company has authorized, they can be held personally responsible to both the company, and the party they injured or harmed.

In addition, the fact that a person is […]

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Directors and Conflicts of Interest

While directors breach their duty of loyalty if they engage in an interested transaction, there are situations where the interested transaction will be allowed:

If the director tells the other directors about the conflict of interest, and a majority of board members who are disinterested approve of the transaction, then the transaction will be allowed.
If the shareholders know about the conflict and they approve of the transaction, the transaction will not be overturned.
If the transaction is fair and reasonable, it will […]

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The Director’s Duty of Loyalty

Because the directors hold positions of trust and confidence in the corporation, they owe a duty of loyalty to the corporation and shareholders. The directors cannot take advantage of the position to get personal advantages, or to help out third parties. The director has to act in the interests of the company and its shareholders first, and cannot engage in activities that are conflicts of interest.

For example, if the director finds out about a business opportunity that would be advantageous […]

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Director Liability for Improper Distributions

Generally, under statutes and bylaws, directors of a corporation decide whether to issue or redeem stock, whether to buy or sell assets, whether to distribute dividends or profits, whether to take out loans, pay debts, or invest in capital. Often, the Articles of Incorporation will provide some limits to the power of the directors by requiring that certain major decisions of the board be approved by the shareholders. Otherwise, the directors decide if the profits of the business get paid […]

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The Business Judgment Rule

While directors have to engage in basic good faith and reasonable care in making decisions, they do not have to make decisions that always have good results. The business judgment rule is a rule that is applied to the acts of directors which allows the directors significant deference and discretion in making decisions, so long as they act in good faith and reasonably. In short, the purpose of the rule is to allow the directors to exercise their business judgment […]

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Director’s Duty of Due Diligence

In addition to the duty of care, directors have a duty of due diligence which is the obligation for the director to be engaged and informed regarding corporate affairs. In short, a director must regularly attend meetings and read the documents related to the activities of the corporation. The director needs to be paying attention, and ask reasonable questions when the circumstances warrant. Directors cannot turn a blind eye to apparent issues that need greater scrutiny, they cannot leave the […]

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The Director’s Duty of Care

As the people responsible for the management of the corporation, directors have a basic duty of care which is the responsibility:

1. to act in good faith;
2. to act in a manner the director reasonably believes to be in the best interest of the corporation; and,
3. to act like a person in a similar position would reasonably act in the same circumstances.

In exercising the duties of the role of a director, directors are entitled to rely on financial statements and […]

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Duties of a Director

Shareholders own a corporation, but they do not manage the actual operations of the corporation. The role of management is held by the board of directors. The role and authority of the board of directors is established in the Articles of Incorporation and by statutes. The directors can be shareholders, but they do not have to be. Regardless, the directors have a duty to engage in the management of the business in a way that is in the best interests […]

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Following Corporate and Entity Formalities—Summary

Guidance from Company Documentation

Because corporations and limited liability companies are separate entities, the formalities are the very thing that establishes that the entity is actually operating independently. Observing the formalities is important for the protection of the entity, and all of the people involved in the various roles and functions of the company. The articles of organization or incorporation, the bylaws and operating agreement, along with any resolutions, area the guide for how the persons in the company can comply […]

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Following Corporate and Entity Formalities—Individual Roles II


The board of directors of a corporation is responsible for the company’s management. The board of directors select the officers of the company, and established the overall policy for the business. The board of directors makes the major decisions for the corporation including compensation to officers and employees, stock issuance, approval of important contracts, borrowing or lending money, purchases of capital, and the payment of distributions to shareholders.

Like shareholders, the board of directors must act as a group. Actions are […]

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