When a company suffers losses and someone blames the board, the lawsuit that follows may name individual directors rather than the corporation alone. In this scenario, you might have some questions about what your options are to protect yourself and the business.
When does personal exposure begin?
As a director, you owe the corporation duties of care and loyalty. Care requires you to review relevant information before making a decision, while loyalty requires you to place the company’s interests ahead of your own.
Courts normally start with the business judgment rule, which protects decisions made by independent board members who have no conflicts, act in good faith and pursue a legitimate business purpose. A failed merger, investment or expansion does not create liability simply because the outcome later proves disappointing.
If a claimant overcomes that protection, the court may apply a stricter standard called entire fairness to a conflicted transaction. You may then need to show that both the decision-making process and financial terms were fair; for other claims, the claimant must link a specific breach to a loss recognized by law.
What protections may apply?
A fiduciary claim does not always place your personal assets at immediate risk. Several protections may limit or cover your financial exposure:
- Corporate charter limits: Most states, including Minnesota, allow corporations to limit damages against directors for certain breaches of the duty of care. However, these limits generally do not apply to disloyal conduct, bad faith, knowing violations of law or improper personal benefits.
- Indemnification rights: The bylaws or a separate agreement may require the company to pay your defense costs and cover eligible settlements or judgments.
- Directors and officers liability insurance: The policy may cover defense costs and other losses when the company cannot or does not indemnify you.
These protections work independently, so one may apply even when another does not. If the parties dispute payment, a judge may review the charter, bylaws, indemnification agreement and insurance policy to decide who bears the expense.
Who may bring a claim forward?
The following parties may pursue a lawsuit:
- Shareholders
- The corporation
- Minority owners
- Government regulators
Who files the case shapes the required procedure, the issues you may challenge at the outset and the remedies available. It also determines whether any recovery belongs to the corporation, an individual owner or the government.
How does counsel manage litigation?
Counsel starts by reviewing board minutes, emails and financial reports to learn what information you had before each disputed action. These records may show whether the board reviewed key facts, disclosed conflicts and responded to warnings.
Attorneys then compare the facts with state law and company documents, including the charter, bylaws and agreements covering legal costs. They also notify the insurer because late notice may limit coverage.
Early in the case, the defense may ask the court to dismiss the lawsuit if the allegations do not support a valid claim. If the case continues, both sides exchange records and question witnesses under oath during discovery.
After discovery, attorneys may seek summary judgment, which asks the judge to decide the case without a trial when the key facts are not disputed. If any claims remain, they prepare the evidence and witnesses for trial.