Archived: Liability Issues for Officers and Directors

Able, Baker and Christine own and operate ABC Access, a private high school that caters to the wealthy, offering assurance that graduates will have easy access to the best colleges and universities. When they founded their school they formed a corporation (ABC Access, Incorporated) so that their personal liability would be limited by law. All three owners are shareholders and are on the Board of Directors; Able serves as President, Baker as Chief Financial Officer, and Christine as Secretary.

ABC Access was successful for many years, but the untimely death of their top math teacher was a devastating loss. The school immediately sought a replacement and like a gift from beyond they received a call from David, a graduate from their school who had excelled in math while at the school and had gone on to a renowned east coast university with a major in math and physics.

David had been teaching at a small private college but was now unemployed and inquiring about a position.

Able, Baker and Christine were thrilled that David was available and quickly hired him without any background check, a check that would have revealed that David had been dismissed from his previous teaching job because of complaints that he had been sexually involved with several female students.

It did not take long. David convinced a female student that she needed extra math tutoring and the tutoring sessions became sex sessions. The student became scared, reported her encounters with David, and David was arrested.

The members of the Board of Directors of a corporation set the general policies of the corporation and appoint the Officers. The Officers run the day to day operations of the corporation business. In small corporations like ABC Access, Inc. the Officers and Directors are usually the same people.

The student’s parents will sue David as well as the school, but what about the personal liability of Able, Baker and Christine as the officers and directors of ABC Access, Inc.? The lawyer for the parents may well claim that Able, Baker and Christine are personally liable because, by failing to properly investigate David’s past before hiring him, they breached a duty to the corporation.

Officers and directors of a corporation may be subject to personal liability for acts performed as an officer or director. These liabilities can be divided into two types—(1) liabilities for which the corporation may indemnify the officer or director and (2) those liabilities for which indemnity is not available.

Indemnification of Officers and Directors:

Indemnification of officers and directors means that the corporation will provide for expenses incurred and amounts paid in defending claims brought against them for actions taken in good faith on behalf of the corporation. This indemnification is “first dollar” indemnification, which means that legal representation and defense is provided directly by the corporation as opposed to paid by the officer or director and later reimbursed by the corporation.

Actions subject to indemnity include all actions taken in good faith on behalf of the corporation as an officer or director. Theses liabilities may include allegations of defamation, improper or unlawful employment practices, breach of contract, and failure to pay wages and withheld taxes.
Examples of liabilities that are not subject to indemnity include:

This blog post was archived on April 10, 2017 and is only available for Enterprise clients