The Liability of Board Members
By statute, corporate boards of directors owe certain duties to the corporation, and if they breach those duties, directors may be held personally liable for damages resulting from the breach. However, some state statutes may vary the typical duties owed by directors, and shareholders may also change those duties by amending the articles of incorporation. Those with specific director liability questions should seek legal advice.
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Conflict of Interest
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Board members owe a duty of loyalty to the corporation, meaning that they cannot profit at the expense of the corporation. A director has a conflict of interest if he is party to a transaction with the corporation, or has a financial interest in such a transaction that can foreseeably influence his judgment. Director liability for conflict of interest can generally be cured if a majority of the non-interested directors vote to approve the transaction despite the director's interest.
Duty of Care
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Board members owe a duty of due care to the corporation. This duty of care is generally defined by courts the "business judgment rule." The business judgment rule mandates that directors manage the corporation in good faith, in the best interests of the corporation, and with the same level of care that a normal, prudent person in the same position would exercise. Should a court determine that the business judgment rule was not met, directors may face personal liability.
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Corporate Opportunity Doctrine
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Directors who discover a business opportunity that may benefit their corporation may not take advantage of that business opportunity themselves; they must first present the opportunity fully and fairly to the rest of the board, and give the corporation the chance to act upon it. The corporate opportunity doctrine applies even if the company would not be able, financially speaking, to take advantage of the opportunity. The director must give the corporation all of the information, or he may face liability.
Limiting Liability
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Although shareholders may choose to limit the abovementioned general duties, certain forms of liability cannot be limited under the law. A corporation cannot limit personal director liability for harm intentionally inflicted on the corporation or shareholders; for making an unlawful corporate distribution; for intentional criminal acts; or for any financial benefit received to which the director is not entitled.
Indemnification for Expenses
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Unless shareholders agree otherwise, the corporation must generally indemnify for reasonable expenses a director who successfully defended a suit brought against him because of his position. Should the director not succeed in defending himself, the corporation may still choose to indemnify the director for his expenses if the director acted legally, in good faith, and in the belief that he was acting in the best interests of the corporation. However, the corporation cannot generally indemnify a director who is found liable to the corporation itself, or who received an improper benefit at the corporation's expense.
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