Where are the Loopholes in Corporate Liability Limitations?

My good friend and attorney colleague, Steven A. O’Rourke http://www.calcorplaw.com is a very sharp corporate and business lawyer. He is a guy that other attorneys go to when they want to debate the law. But he is also a guy that entrepreneurs and business owners should go to when they are concerned that they are thorough and accurate because Steve strives to be both. We often kick around concepts that affect the entrepreneurial community and below, I want to share another piece of work that Steve produced as a result of a recent conversation that we had.

Beginning of Contributor Comments:

You can reduce exposure to legal liability by learning the differences and interplay of the different legal regimes that apply to shareholders, directors and officers, respectively. When a prospective client asks me to create a corporation for which he would be (an) owner, an officer and (a) director, he usually states his purpose as wanting “personal immunity” As a matter of professionalism, I always assure the client knows the general law before I start preparing documents.

Shareholders are said to be “immune” from corporate liabilities. The California corporate statute says nothing about that; neither does the Delaware code. Indeed, for its first 60 years, the California constitution expressly provided that shareholders were liable for their pro-rata share. So, there is no structural reason why shareholders ought to be immune. Rather, each state has a presumed intention generally to immunize shareholders.

Lawyers refer to “piercing the corporate veil” (imposing corporate liability on shareholders) as an “equitable remedy,” which means that courts may pierce the veil whenever justice requires. There is no prescribed test, so “expert” articles listing the “factors” must be read with caution.

Takeaway #1: “A shareholder who has no other involvement can assume, but can never assure, shareholder immunity.”

Shareholder immunity, even if not pierced, is somewhat a misnomer because any shareholder who acts in an additional role opens himself to liability for actions in that other role.

Shareholders who are also directors are not immune from the liabilities imposed on directors. Corporate law in most states allow corporations to eliminate some, not all, bases for director liability for failing to meet the director’s fiduciary duty standard. Even when the corporate charter (some states call it the “Articles,” some say “Certificate”) or bylaws recite that the “liability of directors to the corporation are eliminated to the fullest extent permitted by law,” bear in mind that the law has many exceptions regarding the “fullest” extent. A charter’s “elimination” of liability applies only to the director’s liability “to the corporation,” not to 3rd parties such as employees, customers, suppliers, banks etc. And not for legal remedies other than payment of money. And state laws also preserve director liability for many acts.

For example, California prohibits elimination of liability for “intentional misconduct,” “absence of good faith,” “improper personal benefit,” “reckless disregard,” and a “pattern of inattention.” Consider the ease with which a director can be accused of failing to act in “good faith” or with necessary continuing “attention.”

Takeaway #2: a Director ought to seek legal advice on how to prevent, eliminate, reduce, indemnify, insure, waive or contract-away director’s liabilities.

In California, Delaware and most other states, officers have the same fiduciary duties as directors but the corporation’s charter cannot reduce or eliminate the scope of officer’s liability for breaches.

Takeaway #3: Officers ought to also seek legal advice to control liability.

* * * End of Contributor Comments * * *

Joel’s thoughts:

1. The liability of management, whether directors or officers, is serious and must be well understood. The responsibility is far reaching as I have discussed before. See: http://tinyurl.com/crxjqw.

2. Anyone who plays ball in the corporate arena takes risk. Know the risks so that you can properly assess the required returns. Always know the facts. Play smart. And,

3. If you have any questions on these complex issues call a securities attorney. And try to become friends with a guy like Steve O’Rourke. He would be a good guy to call and get to know.

Do you have an opinion or thought about this topic? Please write a comment about this article by entering your thoughts in the form on my website. Let us know what you think and if my thoughts resonate with yours. Our readers enjoy reading what others think.

Also, send a link to this article to one or more of your friends and get them to become one of our subscribers. This will help us to expand our circle of influence and allow us to share this and other great material with your friends.

Finally, if you would like to participate with me in Brian Tracy’s iLearning Global Business Success Program where I am a member of the faculty, then go to http://www.joelblock.com/ilg to learn more. Thank you for being one of our loyal readers. We appreciate you and we are rooting for your success.

Hot this week

Did David Wineland and Serge Haroche Steal Idea For The Nobel Physics Prize?

Dr. Omerbashich says the Royal Swedish Academy is a Crime Scene and he has the proof that Nobel laureates stole his discovery.

New Approaches to Disaster Relief Challenges

Disaster relief has always been a challenge. NASA, Google,...

3 Legitimate Money Making Methods to Supplement Your Income

In a perfect world, when your landlord raises your...

2016 Predictions by World Renowned Medium and Psychic Lindy Baker

World renowned medium and psychic Lindy Baker is interviewed by The Hollywood Sentinel, discussing psychic power, the spirit world, life after death, areas of concern in 2016, and much more.

Digital Coupon Customers Spending More Than Double At Stores

A new study shows that customers who use digital coupons go shopping more for groceries and other household goods more often and spend more on their shopping trips.

Goodyear Blimp Brings America 250 Sky View to Floyd Bennett Field

Goodyear Blimp brings America 250 sky view to Floyd Bennett Field, thrilling kayakers and aviation watchers at Jamaica Bay.

Forklift Certification in the Age of Automation: Why Human Operators Still Matter

For years, discussions about automation have been accompanied by...

Carl Buddery Named CEO of Tufcot Engineering After Dacke Industri Acquisition

Carl Buddery has been appointed CEO of Tufcot Engineering Ltd, the UK composite materials specialist owned by Dacke Industri.

2026 Guide to the Top Fence Installation Companies Across America

Table of Contents Methodology 1. EverFence 2. Superior Fence...

How to choose the right size for poly bubble mailers in apparel shipments

Key Takeaways Measure the folded garment first, then size...

USDA Charges 33 Los Angeles Retailers in SNAP Fraud Crackdown

USDA says 33 Los Angeles SNAP retailers face charges after a SNAP fraud crackdown tied to cash trafficking and banned sales.

Related Articles

Popular Categories