Directors owe fiduciary duties towards the shareholders and the company they manage. This article addresses the two common doctrines used to limit the Board’s liabilities in the event of a breach: limitation of liability, and indemnification. Further, director & officer insurance is another method often used to further protect the Board from personal liabilities.

Limitation of Liability

Statutory limitation of liability exists within a corporation’s certificate of incorporation. The certificate can severely limit or altogether eradicate directors’ personal monetary liability towards the corporation and stockholders in the event of failure to uphold duty of care. This statute extends that protection by allowing corporations to monetarily exonerate directors for breach of fiduciary duties, with the sole exception that directors who committed the breach due to conflict of interests or in bad faith cannot be protected.

Indemnification

Indemnification is a statute that similarly shields directors from liabilities originating from their services to the corporation. Corporations are allowed to indemnify directors as long as they acted in good faith, with the best interests of corporation and stockholders in mind, and without any reason at the time to believe their actions would be imprudent or unlawful.

D&O Insurance

Directors and officers (D&O) liability insurance is typically obtained by the company to protect the personal assets of corporate directors and officers, and in the event they are personally sued by third parties (such as employees, investors, customers, or other parties), for actual or alleged wrongful acts in managing a company. The insurance, which usually protects the company as well, may be used to cover legal fees, settlements, and other costs.

If you have questions related to how to limit the Board’s liabilities, contact us today for a consultation.