While Corporations afford a great deal of protection to shareholders, the officers and directors of corporations are sometimes sued by shareholders or third parties in their individual capacities. It is important for those officials to be protected from liability resulting from their business decisions and from personally bearing the cost of any litigation.
Acts Giving Rise to Liability
No matter what position a person holds in a corporation-officer, director or employee—they may be held liable for negligent or intentional acts that they personally performed. For example, if an employee negligently drove a company vehicle on company business and injured someone, the employee could be personally liable for his own conduct in addition to the liability of the corporation.
Officers and directors of corporations are sometime sued by shareholders claiming that they made bad decisions while acting on behalf of the corporation. North Carolina and many other states have adopted the “Business Judgment Rule” to provide some protection to corporate officials from these suits. The business judgment rule provides that directors and officers may not be held liable for their acts if they acted in good faith, with the care of an ordinarily prudent person in a like position under similar circumstances, and in a manner that they reasonably believe to be in the best interest of the corporation.
Even if the Business Judgment Rule ultimately results in a favorable outcome for a director or officer, the cost of litigation can be high. Not only officers and directors can be protected from the expense of litigation and possible judgment, but also employees and agents of the corporation. There are two main ways that protection can be obtained. First, liability insurance can be purchased to provide legal defense to claims and to pay any judgment that may be rendered. Second, the officers, directors, employees and agents can be indemnified by the corporation from expenses and losses they may incur in defending a suit against them.
Liability insurance policies can be obtained with coverage for corporate directors, officers and employees. The insurance premiums are paid by the company but provide funds to pay attorneys to defend claims and also to pay a judgment that may be entered. The business lawyers at Cannon Law, P.C. can assist you in evaluating policies so that you have not overlooked provisions that may limit coverage you need.
The North Carolina Business Corporation Act permits corporations to indemnify directors, officers and employees in certain situations, requires indemnification in some circumstances and allows a court to order indemnification in other situations. North Carolina corporations are permitted to indemnify an individual made a party to a suit because of that person’s status as a director, officer, employee or agent if (1) the person acted in good faith, (2) reasonably believed that his or her conduct was in the corporation’s best interest and,(3) in the case of any criminal proceeding, the person had no reasonable cause to believe the conduct was unlawful.
North Carolina corporations must indemnify a director or officer who was wholly successful defending a suit in which he was a party because he is or was an officer or director of the corporation. In addition, an officer or director, unless the articles of incorporation provides otherwise, can apply for indemnification to a court and the court is permitted to order indemnification if it determines that the officer or director is entitled to mandatory indemnification under N.C.G.S. § 55-8-52 or that the officer or director is fairly and reasonably entitled to indemnification in view of all of the relevant circumstances.
When an officer or director is the subject of a suit by his or her own corporation, indemnification may still be available. However, the circumstances can be quite complex and good legal advice is necessary to reach good decisions when faced with those claims. Contact the business lawyers at Cannon Law, P.C. for additional information on protection of your officers, directors, employees and agents.