Liability of Directors, Officers, and Shareholders

Question 1

When are directors and officers liable for damages?

Answer 1

When they arise out of

1. violation of their fiduciary duties; or,
2. Unauthorized actions

Question 2

When can an officer or director not be exculpated by the corporation?

Answer 2

○ the breaching director (or officer) knew or believed the breach was clearly in conflict with the corporation’s best interests;
○ the director (or officer) derived an improper personal benefit from a transaction; or
○ the director approved an unlawful distribution of corporate assets.

Question 3

When a fiduciary has usurped a corporate opportunity, a court may:

Answer 3

Impose a constructive trust to pass back profits

Question 4

When a corporate fiduciary has competed with the corporation, the corporation could also seek:

Answer 4

Recovery of the profits earned in competition
+
Salary paid (by the corporation) during the competition

Question 5

When there has been bad faith on behalf of a fiduciary, the corporation may seek:

Answer 5

punitive damages even if the corporation has not incurred any monetary damages.

Question 6

If sued by the corporation for violating a fiduciary duty, directors and officers can raise the following defenses:

Answer 6

1. dissent from or non-participation in the courses of action that violated the fiduciary duty;
2. approval by a majority of disinterested directors or shareholders with knowledge of all material facts concerning the conflict-of-interest transaction; OR
3. the transaction was itself fair and reasonable to the corporation at the time it was entered into or authorized.

Question 7

When are directors and officer personally liable to a third party

Answer 7

• Torts: officers, directors, and shareholders are always liable for their own torts; you cannot escape liability for your own torts by saying that you are an officer, director, or shareholder.
• When they enter into a contract that they do not have authority to

Question 8

A North Carolina corporation must indemnify directors and officers who have been

Answer 8

wholly succesfull in defense of any preceding to which they were a party because of their corporate managerial role for reasonable expenses

Question 9

a North Carolina corporation may indemnify directors and officers who have been parties to a proceeding because of their corporate managerial role against liability incurred in such a proceeding if they:

Answer 9

Have conducted themselves in good faith + reasonably believed that their conduct was in the best interest of the corporation

Question 10

No indemnification is permissible if the director or officer was found liable

Answer 10

• for receiving an improper benefit; OR
• was found to be liable to the corporation. That is, there can be no indemnification for a judgment in a derivative suit.

Question 11

Indemnification occurs when

Answer 11

After the suit against an officer/director concludes

Question 12

Can Individual shareholders be held personally liable

Answer 12

Generally, no, not liable for the debts of the corporation that they hold stock in

Question 13

When can individual shareholders be held personally liable?

Answer 13

If the veil is pierced, then there is no limited liability for the shareholder; instead, the shareholder becomes personally liable for the corporation’s obligations.

Question 14

A court will invoke the “piercing the veil” doctrine if:

Answer 14

the corporation has become a mere instrumentality of a dominant shareholder or shareholders

Has there been such a domination of finances and practices that the controlled corporation is an illusion or conduit for the controller?

Question 15

Factors to examine when piercing the veil

Answer 15

○ the amount of financial interest, ownership, and control that is being maintained and exercised over the corporation;
○ the extent to which the corporate entity is being used for personal purposes;
○ the extent to which corporate and personal funds have been commingled;
○ the extent to which corporate formalities have not been observed; and
○ the extent to which the corporation is undercapitalized.

Question 16

What must π prove to pierce the corporate veil

Answer 16

(1) shareholder “control” that effectively renders the corporate form a façade,
(2) use of the corporate form to obtain an improper or fraudulent purpose, and
(3) injury resulting from this wrongful use of the corporate form.

Question 17

When can a corporation be liable to third parties?

Answer 17

1. A corporation can be liable to a third party for injuries caused by the tortious conduct of its officers or agents under the doctrine of respondeat superior.
2. A corporation is contractually liable for any contract entered into on its behalf by officers or agents who act within their actual authority to do so.
3. A corporation can also be contractually liable on a contract when a party enters into it on the corporation’s behalf but without actual authority, if a court invokes the doctrine of apparent authority.