Liability of Corporation Directors in the United States

By law, in America, it is presumed that the directors of a company act in good faith

The liability of the Corporation's directors towards shareholders: personal financial responsibility. Officers and Directors [simply put, the company's directors] have what is called a "fiduciary duty" towards the shareholders.

The "fiduciary duty" is the highest level of what is called the "standard of care". Failing to meet the "standard of care" imposed by law exposes directors to personal liability for damages suffered by the Corporation's shareholders.

Thus, the directors of a company in America are not personally liable with their own assets for damages suffered by shareholders due to good faith errors made during the management of the company.

This page discusses the aspects of Officer and Director liability in Corporations

The concept of "Negligence" in American law

Without going into detail, anyone who violates the Fiduciary Duty is "negligent". There are different types of negligence:

Gross Negligence - This is when a person pays no attention to the consequences that their actions may have on others;
Comparative Negligence - This is when the person who suffered a damage also partly contributed to it [for example, when someone involved in an accident was not wearing a seatbelt]: compensation will be partial;
Vicarious Liability - This is when a person is automatically responsible for the actions of others [for example, a dog owner is responsible for damages caused by the dog].

Constituent elements of "Negligence"

The constituent elements of Negligence, or those necessary to establish Negligence, are four. To simplify greatly:

Existence of a duty of care;
Breach, violation of the "duty of care";
Causation, the violation is the cause of the damage;
Damages, actual damage has occurred.

When establishing companies in the United States, we are often asked about the liability of the company's directors in America. The following analysis is based, for simplicity, on the corporate law of the state of Delaware. Each state has different laws, although the basic concepts about director liability remain the same.
The first thing to clarify is who the Officers of a corporation are and who the Directors are.

The Officers are mandatory roles in a corporation. If a corporation has only one shareholder, they will assume all the roles of the Officer positions, which are:

President
Vice President [there can be more than one]
Treasurer
Secretary

Historically, the Treasurer oversaw the corporation's finances, while the Secretary was the custodian of corporate books and records. Today, this distinction has faded.

The Directors are the members of the Board, akin to the board members of joint-stock companies in Italy: they are the ones who handle the actual management of the company.

The so-called Business Judgment Rule

Or the presumption of good faith by company directors in America

The Business Judgment Law doctrine assumes that directors act in good faith and in the interest of the company in carrying out their management and supervisory activities, and this effectively offers strong protection against potential lawsuits for damages by shareholders.

The presumption can be overturned by the shareholder only if they prove that the company's directors did not adhere to the Fiduciary Duty standard imposed by law. In other words, it is presumed that a company director benefits from the Business Judgment Rule if:

They acted in good faith;
They acted solely in the interest of the Corporation;
They acted with the Diligence of a Prudent Person;
They did not waste corporate resources [including overpaying for goods or services];
They are not involved in conflicts of interest in corporate decisions.

The presumption set by the Business Judgment Rule is very strong and as such difficult to overcome, thus protecting directors from personal monetary liability towards shareholders for decisions and actions taken during their duties as company directors.

Director Liability in America

What does the Fiduciary Duty, according to American corporate law, entail for Corporation Officers and Directors towards shareholders?

The Fiduciary Duty has several components:

Duty of Care - Directors must make decisions only after studying the subject, case, or situation on which they are called to decide;
Duty of Good Faith - Directors must act in good faith for the corporation's interest;
Duty of Confidentiality - Directors must not disclose confidential information to third parties for profit;
Duty of Disclosure - Directors must act with complete transparency towards shareholders, sometimes even explaining the circumstances that led to certain decisions;
Duty of Loyalty - Directors of a corporation cannot use their position for personal interests instead of or alongside the company's interests.

The director who violates the Fiduciary Duty is personally liable for damages caused to shareholders

The director is liable to shareholders even for unjust enrichment obtained by acting in a conflict of interest situation, even in the absence of damage caused to shareholders.

Conflict of interest situations for directors of an American corporation: the case of Unjust Enrichment

A director who benefits directly or indirectly from a corporation's decision violates the Duty of Loyalty and as such may be required to reimburse the unjust enrichment even if the corporation's shareholders did not suffer damages from that particular decision made by the director. In conflict of interest situations, the corporation's director is required to inform the board of directors, which will make decisions on the matter, including informing shareholders.

Even if directors have made an unjust profit, shareholders have the right to demand the return of the unjust enrichment, even if they have not suffered direct damages from the directors' actions.

The criminal liability of company directors in America

In case of fraud, the director is also criminally liable for their actions, just as provided by Italian law. On a side note, it should be observed that one does not need to be a company director either in Italy or the United States to face criminal consequences if a fraud has been committed.

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DISCLAIMER

The information contained in this article does not constitute legal advice or professional consultation but is solely general information for informational purposes.

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Corporate Compliance in the United States: The Directors