Legal Blogs

When Officers and Directors are Liable to Shareholders

Officers and directors have a very important role within a business organization. The job of these officers and directors is to steer the company in the right direction, help to secure the short-term and long-term success of the business, and protect and grow the investment of shareholders. The officers and directors in charge of steering the corporation have a fiduciary obligation to act in the best interests of the business. This means they must not do things that jeopardize the company or that benefit their own interests at the expense of the corporation.

Unfortunately, sometimes those in charge of a company will fail to live up to their legal duty. When this happens, there may be situations where officers and directors are liable to shareholders. Determining if company insiders can be held accountable to shareholders or not can be complex and taking legal action is a challenging process. It is imperative for shareholders, as well as for officers and directors, to have legal representation when a dispute arises or when accusations are made that the company insiders acted inappropriately. The Irvine, CA business litigation lawyers at Brown & Charbonneau, LLP can provide the representation you are looking for.

When Officers and Directors are Liable to Shareholders

Officers and directors are liable to shareholders if they breached their fiduciary duty to the company or acted inappropriately. This could occur, for example, if the corporate officers perpetuated an accounting fraud, lied on financial statements, or used business assets to enrich themselves at the expense of company operations.

Officers and directors will not be liable to shareholders simply for making decisions that turned out to be wrong. The business judgment rule protects those in a position of power within the company from being held liable any time and every time something goes wrong.  Under the doctrine of the business judgment rule, courts do not review the decisions made by directors who:

  • Performed their work with the corporation in good faith.
  • Exercised reasonable care, such as an ordinarily cautious person would, under the circumstances.
  • Acted in a way that the officers and directors reasonably believed was in the company’s best interests

If shareholders want to take legal action against officers and directors, the shareholders will generally need to file a shareholder derivative action. Essentially, this means that one or more representative plaintiffs files a lawsuit on behalf of the business against the officers and directors to force the directors to stop a behavior; require the directors to return ill-gotten gains; or otherwise seek a remedy for the failure of the insider’s to act appropriately.

In order to prevail in a lawsuit and resolve the case with a finding that officers and directors are liable to shareholders, shareholders have the burden of proving that the directors or officers acted inappropriately and breached a legal duty.  An experienced Irvine, CA business litigation lawyer can represent shareholders in making their case or can represent officers and directors in situations where they are named defendants in litigation. Call today to schedule a consultation and learn more about how Brown & Charbonneau, LLP can help you.