Despite recent responses designed to combat the increased liability exposure of directors and officers, the personal risks for corporate insiders remain significant. With corporations operating in an ever-complex regulatory maze, there has been an increased focus on corporate accountability. The difficulty in resolving director and officer liability issues, however, arises in balancing the need to punish misguided fiduciaries with the need to protect aggressive managers who take good faith risks to produce increased corporate profits. While long-range solutions to this balancing problem are essential, directors and officers should pursue short-term tactics to reduce their risk of personal liability.
Because it is relatively easy to allege that an individual has breached a fiduciary duty, a director or officer may become embroiled in a lawsuit without actually doing anything "wrong." Consequently, all directors and officers should attempt to reduce their exposure to liability. In particular, corporate insiders should understand that certain decisions are especially susceptible to litigation and, therefore, more likely to result in personal liability. Courts are more inclined to second-guess management decisions that impact on shareholders' "ownership" rights. For example, if aboard of directors approves a cash out merger plan that undervalues the shareholders' stock, a court may be more inclined to find the directors personally liable. In this instance, management's decision has severed the shareholders from their investment and caused them to suffer a loss in their role as "owners" of stock.' In contrast, a decision by the board of directors to enter a new product market that eventually turns sour is unlikely to result in liability. Although shareholders may suffer a loss on their investment because of the board's decision, the loss is incurred in the share-holders' capacity as investors. Consequently, management should exercise greater caution on decisions that directly affect the shareholders' "ownership" interests-decisions concerning, for example,stock issuance, redemption, cash out, or merger."
Christopher C. Whitson,
40 Vanderbilt Law Review
Available at: https://scholarship.law.vanderbilt.edu/vlr/vol40/iss3/9