List of Potential Liabilities Facing Directors and Officers

Main Categories of Liabilities and their Definitions

Here is a quick list of categories and their definitions:

• Management, Business, and Operations: Directors and officers can be held liable for decisions related to managing and operating the company, especially if their actions result in financial losses or harm to stakeholders.
• Informed Business Judgment: Directors and officers are protected from liability if their decisions are made in good faith, based on adequate information, and in the best interest of the company.
• Unauthorized or Ultra Vires Actions: Directors and officers can face liability if they take actions that are beyond their legal authority or in violation of the company's bylaws.
• Self-Dealing and Conflicts of Interest: Directors and officers must avoid situations where their personal interests conflict with the interests of the company, as such conflicts can lead to potential liabilities.
• Change of Control Situation: In situations involving a change of control or corporate transaction, directors and officers must act diligently to protect the interests of shareholders and avoid conflicts of interest.
• Other Matters Involving Shares and Shareholders: Directors and officers can face liabilities related to issues such as stock issuances, dividends, shareholder rights, and disclosures.
• Matters Involving Taxes: Directors and officers may be held responsible for ensuring compliance with tax laws and regulations, and any errors or omissions could lead to liability.
• Miscellaneous Matters: This category encompasses a wide range of potential liabilities, including regulatory compliance, environmental matters, employment issues, and other legal and ethical responsibilities not covered by the above categories.

The following checklist is intended to give you a better understanding of the many potential exposures directors and officers face today.

Management, Business and Operations

1. Acquiescence in conduct of fellow directors engaging in improper self-dealing.
2. Aiding or abetting misconduct of others.
3. Avoiding unlawful political contributions.
4. Awareness of internal management controls.
5. Compensation arrangements and reports of compensation committee.
6. Continuing a wrongful practice after learning of its impropriety.
7. Cooperation with regulatory authorities.
8. Corporate acquisition which would result in loss of corporate assets.
9. Corporate financial delinquencies.
10. Counsel’s advice as to possible libel or slander.
11. Dealing responsibly with corporate debts.
12. Dishonored corporate checks.
13. Dissent from improper acts of board or committees and recording of dissent.
14. Executive committee proceedings.
15. Extending credit only as warranted.
16. Filing annual and periodic reports.
17. Guarding against corporate payment of bribes or making illegal payments.
18. Inefficient management resulting in losses.
19. Informal dissolution or liquidation of corporation.
20. Infringement of patents, copyrights or trademarks.
21. Minutes of board and of all committees.
22. Misuse or nonuse of electronic data processing.
23. Monthly operational reports and financial statements.
24. Qualifying corporation in other states where it does business.
25. Receiving personal benefit or gain as a consequence of service performed as a director or officer.
26. Reports of auditors and of audit committee.
27. Recording dissent from wrongful acts at meetings not attended, after reviewing minutes.
28. Selling or transferring corporate assets only for adequate consideration.
29. Shirking responsibility.
30. Statements of corporate policy in areas that frequently generate litigation

Informed Business Judgment

31. Being inquisitive.
32. Consulting legal counsel, auditors and other experts and corporation’s officers and managers to obtain information.
33. Decisions based on adequate information and intelligent and advised judgment.
34. Examining reports and documents before signing.
35. Ignorance of corporate books and records.
36. Inspecting corporation’s books and records when necessary to keep abreast of its activities.
37. Making reasonable investigations as necessary.
38. Making use of all available information.
39. Registration of statements and other reports and filings.
40. Using expertise of you own and others.
41. Verifying facts in official documents before signing and filing them.

Unauthorized or Ultra Vires Actions

42. Activities in which the corporation engages as being only those permitted by its corporate powers.
43. Compensation and benefits paid to directors and officers, verified for reasonableness.
44. Consulting counsel for advice as to corporate powers under statutes, charter and bylaws.
45. Declaring and paying dividends only as provided in corporate powers.
46. Distributing assets with adequate provision to pay or secure corporate debt.
47. Dividends paid, adequate and not excessive.
48. Obedience to charter and bylaw provisions.

Self-Dealing and Conflicts of Interest

49. Awareness of conflicts of interest.
50. Conduct of fellow directors engaging in self-dealing.
51. Contracts with corporation involving self-dealing.
52. Corporate contracts as corporate assets.
53. Corporate opportunities when seized by directors or officers.
54. Disclosing personal interest in management transactions.
55. Engaging in a competitive enterprise.
56. Inside information used to obtain secret profits.
57. Key employees as corporate assets.
58. Loans by or to corporate officers, directors or shareholders as involving self-dealing.
59. Preference at expense of creditors or other shareholders.
60. Transactions between corporations having common directors.
61. Transactions with other entities in which an officer or director is interested

Other Matters Involving Shares and Shareholders

72. Annual reports.
73. Beneficial ownership of shares, application of Section (16)b of Securities Exchange Act.
74. Control person’s vicarious liability.
75. Deceptive representations.
76. Delivery of securities promptly after sale.
77. Disclosures insufficiently or improperly made.
78. Discrimination against minority shareholders.
79. Fraudulent conduct in connection with purchase or sale of securities.
80. Fraudulent methods, misstatements or omissions relating to material facts.
81. Fraudulent reports, financial statements of certificates.
82. Freeze-out mergers without business purpose.
83. Insider making short sales.
84. Insider trading without disclosure of non-public information.
85. Interstate use of mails in sale of unregistered securities.
86. Material misstatements in filings, registration statements or reports to agencies.
87. Misuse of insider information.
88. Prospectus and communications with investors.
89. Proxy context filings.
90. Proxy statements.
91. Reports to SEC and state agencies.
92. SEC filings.
93. Short swing profits in stock trading.
94. Tipping by insiders.
95. Conflicts of interest.
96. Earnings forecasts.
97. Extent of board participation in improper actions.
98. Illegal payments.
99. Material facts.
100. Political contributions.
101. Pre-tax income
102. Publicizing information as to favorable or unfavorable transactions or occurrences.
103. Sales information.
104. Sufficiency of disclosures
105. Surplus earnings.
106. Timeliness of disclosures.

Matters Involving Taxes

107. Causing corporation to incur unnecessary tax liability or penalty.
108. Failing to monitor filing of tax returns and payment of taxes.
109. Failure to obey requirements of tax laws and regulations.
110. Failure to require withholding in connection with Social Security or income taxes.
111. Failure to secure funds withheld for Social Security or income taxes.

Miscellaneous Matters

113. Aiding and abetting actions of others.
114. Carelessness in concluding business or legal matters.
115. Commercial bribery not disclosed.
116. Consenting to improper or illegal actions resulting in losses.
117. Detecting and preventing embezzlement of corporate funds.
118. Failing to see what could be seen by merely looking.
119. Federal Election Campaign Act.
120. Federal Corrupt Practices Act of 1977.
121. Fraudulent interstate transactions.
122. Inducing corporation to commit breach of contract.
123. Inducing intentional or careless wrongdoing by corporation.
124. Ignoring statutory or regulatory requirements.
125. Insufficient monitoring or supervision of officers or other employees.
126. Non-disclosure of questionable or unlawful actions.
127. Racketeering activity.
128. Treble damages or civil fines for statutory violations.
129. Use of mails, wire services, telephones, radio or television to defraud.
130. Wasting corporate assets.
131. Willful wrongdoing.

Conclusion

In conclusion, the role of directors and officers in corporate governance comes with significant responsibilities and potential liabilities. This comprehensive article has explored a diverse array of areas where directors and officers may face legal exposure, including management decisions, conflicts of interest, unauthorized actions, and matters involving shareholders and taxes.

It is crucial for corporate leaders to remain vigilant, make informed decisions, and adhere to best practices to mitigate risks and protect their companies and stakeholders. By staying abreast of evolving legal and regulatory landscapes and investing in appropriate protections like Directors and Officers (D&O) liability insurance, directors and officers can navigate these potential liabilities with confidence, ensuring a stable and prosperous future for their organizations.