Director liability when you’re no longer a director?By Nina Kaufman, Esq.
From the Department of “Hey, That’s a Good Point!” comes this article on Board of Directors liability by attorney Alan Sklover, Esq. (yes, you can learn interesting things from your LinkedIn groups!). It has to do with corporate housekeeping, directors and officers, and how to protect yourself against future entanglements.
Why is this relevant? Because small businesses often ask family and friends (and advisors) to sit on their board or somehow serve the company to either (1) get the benefit of their expertise; and/or (2) offer “equity” in exchange for investing money in the corporation or providing services to it.
For some, it’s an exciting ride to be part of the management of a small business. What they don’t focus on, though, is that there are risks to participating.
THE GENERAL RULE: Usually, directors and officers of a corporation are shielded from being sued personally for the reasonable decisions they make while serving as directors and officers. The concept is that, if you are acting fairly on behalf of the corporation, you should not be held personally liable for those actions.
But that doesn’t prevent you from being named in a lawsuit. You can’t stop someone from suing you; your best hope is to prevent them–as quickly as possible–from succeeding. As Alan Sklover discusses in “Continuing Indemnity: a Key Objective for Corporate Officers,” the issues can get murky once you leave the corporation. Here are some of the important questions to ask about director and officer liability:
- Do the bylaws provide protection for directors and officers after they have left the Corporation?
- Does the Corporation have directors and officers liability insurance?
- If so, our former directors and officers covered?
- Will you be notified if there are any changes in coverage?
- Will the corporation agree to provide you with indemnification if such a situation arises? (Although, frankly, it may not amount to much if there’s no insurance in place).
Have you read your corporate bylaws today? What do they say if you choose to leave?