Lawsuit Against Officers or Directors of a Corporation
In California, officers and directors of corporations are given principal authority over the primary affairs of the corporation. By law, officers and directors owe certain fiduciary duties, both to the shareholders of the corporation, and to the corporation itself. When an officer or director breaches these duties, or engages in other intentional wrongful conduct such as fraud, the shareholders, or the corporation, have grounds to file a lawsuit against the officers or directors involved.
Breach of Fiduciary Duty Claims Against Officers and Directors of Corporations
An officer or director’s fiduciary duties include a duty of loyalty, requiring that they always act in the best interests of the corporation and its shareholders, and that they abstain from engaging in self-dealing whereby they profit from actions undertaken on behalf of the corporation. An officer or director’s fiduciary duties also include a duty of care, which requires that they exercise reasonable and due care when managing the corporation’s affairs.
What is the Business Judgement Rule?
When allegations of breach of duty arise, directors and officers frequently assert a defense of good faith. This means, that although the shareholders and/or the corporation itself claims harm by the alleged breach of duty, the officers believed that their actions would benefit the corporation. Good faith may apply when the outcome of a certain action taken by directors or officers of the corporation didn’t yield the desired outcome, yet it was their belief at the time, that the action would benefit the corporation. In other words, the directors or officers made an honest mistake.
No human is perfect, and mistakes happen. For this reason, officers and directors are granted protection by what is known as the Business Judgement Rule. The Business Judgement Rule grants a presumption that directors’ decisions are based on sound business judgement. This rule—though not perfect—may insulate directors or officers from liability for making an unintentional bad decision.
Fraud Claims Against Officers and Directors of Corporations
Intentional wrongful conduct of an officer or director may also constitute fraud. Fraud may take the form of a misrepresentation, a concealment or a promise without the intent to perform. For example, lying to shareholders about the financial state of the company may constitute fraud. Fraud claims are based on deceitful conduct of an officer or director. Thus, while most fraudulent conduct will also support a claim for breach of fiduciary duty, not all breaches of duty will constitute fraud.
In a breach of fiduciary duty or fraud lawsuit, those who have been harmed (typically shareholders) seek compensation for their losses. If the lawsuit is brought by the shareholders on behalf of the corporation, for harm suffered by the corporation (as opposed to the shareholders personally), it is known as a shareholder derivative lawsuit.
Whether you’re being sued by shareholders, or you’re seeking to file a claim against the officers or directors of a company, you need an experienced shareholder derivative attorney on your side. These cases are frequently complicated, with lots of moving parts, and more often than not require that outside experts specializing in fields such as forensic accounting be brought in to fully illuminate where, if any breach of duty or fraud occurred.
At Brown & Charbonneau LLP, our team of complex business and trial attorneys have decades of experience fighting for both plaintiffs and defendants in shareholder derivative lawsuits. Contact Brown & Charbonneau, LLP today by calling 714-505-3000 to schedule a consultation with a top Orange County business attorney.