Director liability is commonly thought of in the context of large, multi-national corporations. However, regardless of size of the entity, directors can be held personally liable for the acts of a company. Shareholders, employees, lenders and customers are potential parties in a lawsuit against a board claiming damages or losses incurred were the result of director errors, omissions, providing misleading information or other performance as they relate to the company.
Although statutory provisions or corporate by-laws may provide for indemnification of directors, it is only as valuable as the company has assets available to defend claims and satisfy judgments. In some instances, these assets may be insufficient, which places a director’s personal assets at risk. Not to mention that litigation can be expensive, time consuming and distracting.
Regardless of whether the business is large or small, individuals serving on boards of private companies should take steps to minimize their risk. Directors must be diligent, act in good faith, and take action with the care that a reasonably prudent person would use. All actions must be within the confines of applicable law and the company’s Articles of Incorporation, by-laws, resolutions and policies. Board meetings should be attended and directors versed in the matters before the board in order to make thoughtful and informed decisions. Exposure can also be reduced by implementing operating guidelines, conflict of interest policies, orientation programs, periodic training, and financial policies for directors. Director and Officer liability insurance can also be provided for financial protection of directors.