Officers Liability: Is Your Business Judgment Legally Defensible?

The duty of care requires a corporate officer to act on an informed basis, in good faith, and in the honest belief that the action taken is in the best interests of the corporation, and an officer who makes a decision without adequate investigation or deliberation can be held liable for the resulting harm. The business judgment rule protects officers from liability for business decisions that are later shown to have been wrong, as long as the officer was disinterested in the transaction, was adequately informed, and acted in good faith.

Board of directors meetings and breach of fiduciary duty counsel can advise on the specific duty of care, duty of loyalty, and business judgment rule obligations and develop the fiduciary duty compliance and business judgment rule defense strategy.

The Caremark doctrine holds that directors and officers have an obligation to ensure that reasonable information and reporting systems exist that would enable them to learn about material risks and compliance failures within the corporation, and an officer who utterly fails to implement any reporting or compliance systems, or who consciously disregards red flags, can be held personally liable for the corporate harm that results. A Caremark claim requires the plaintiff to show that the officer acted in bad faith by consciously and intentionally disregarding her oversight responsibilities.

Corporate governance advisory and corporate governance counsel counsel can advise on the specific officer liability legal framework and develop the officer liability defense, governance compliance, and risk management strategy.

Compliance audit and management of risk counsel can advise on the specific Caremark oversight duty and compliance monitoring obligations and develop the oversight compliance and Caremark liability defense strategy.

A shareholder derivative suit is a lawsuit brought by a shareholder on behalf of the corporation against its officers for breach of fiduciary duty, and the shareholder must first make a demand on the board to take action or demonstrate that such a demand would be futile because a majority of the board is interested in the challenged conduct or lacks independence. The most significant derivative claims arise from transactions in which the officer had an undisclosed personal financial interest and from governance failures that allowed fraudulent conduct to harm the corporation.

Corporate litigation and corporate disputes counsel can advise on the specific shareholder derivative suit and breach of fiduciary duty claim risks and develop the derivative suit defense and fiduciary duty breach response strategy.

Section 10(b) of the Securities Exchange Act and Rule 10b-5 prohibit officers of public companies from making materially false or misleading statements in connection with the purchase or sale of securities, and an officer who approves a filing with the SEC containing a material misstatement faces civil liability. Sections 302 and 906 of the Sarbanes-Oxley Act require the CEO and CFO to personally certify the accuracy of each annual and quarterly report, and a false certification can result in criminal liability.

SEC enforcement and Sarbanes-Oxley Act counsel can advise on the specific securities law violation and SOX certification liability risks and develop the securities law compliance and SOX certification defense strategy.

Section 102(b)(7) of the Delaware General Corporation Law permits corporations to include in their charter a provision that eliminates or limits the personal liability of directors and, after the 2022 amendment, officers for monetary damages for breach of fiduciary duty, with limited exceptions for breaches of the duty of loyalty, intentional misconduct, and actions taken in bad faith. The DGCL also requires corporations to indemnify officers who successfully defend against claims, and permits corporations to advance defense expenses before the final disposition of a proceeding.

Indemnification claims and corporate fraud counsel can advise on the specific exculpation provision and indemnification rights under the DGCL and develop the exculpation and indemnification protection strategy.

A D&O insurance policy provides coverage for defense costs, settlements, and judgments in shareholder derivative suits, securities class actions, and SEC enforcement proceedings, and a well-structured policy should provide broad coverage without requiring the officer to pay a large deductible before coverage attaches. The advancement of defense expenses is a critical feature because defending a securities class action or SEC enforcement proceeding can cost millions of dollars even when the officer ultimately prevails.

Insurance coverage disputes and financial reporting investigations counsel can advise on the specific D&O insurance coverage and defense cost advancement issues and develop the D&O insurance coverage and indemnification strategy.

An officer who maintains contemporaneous documentation of the information she reviewed and the deliberations she engaged in before making a significant business decision is in a much stronger position to invoke the business judgment rule as a defense. Implementing a robust compliance and reporting system that monitors the company's compliance with applicable laws, reports material compliance risks to the board, and creates a documented record of how those risks were addressed is the most effective defense against Caremark claims.

Securities litigation and corporate crime counsel can advise on the specific governance practice and documentation standard requirements and develop the governance documentation and business judgment rule defense strategy.

An officer who becomes the subject of a shareholder derivative suit, an SEC investigation, or a criminal inquiry should retain experienced legal counsel immediately and refrain from destroying documents or communicating with other potential witnesses. The officer should also promptly assess the scope of her indemnification rights under the corporation's bylaws and submit a formal request for advancement of defense expenses to the corporation's board without delay.

Federal criminal defense and internal investigation services counsel can advise on the specific claim defense and investigation risk management requirements and develop the officer liability defense and investigation response strategy.