Legal Question in Business Law in California

Re: Personal liability of the board of directors to the corporation

The directors of a corporation can be held personally liable for losses to the corp, if they breached their duty of care and due diligence.

Regarding the incorrect minutes, that could be a sufficient breach to "pierce the corporate veil" as well.

There are a lot of holes that need to be patched up, here, in order to give you a better answer. If the directors hired this person without checking into his background in any way, and he was placed in a position where he could do some damage, they may very well have personal liability.

Let me know if I can help you further. 925-924-0100

Re: Personal liability of the board of directors to the corporation

Further information needed: what, if anything, did any of the director's know of the problem? Why is there any valid claim for liability of other directors?

Re: Personal liability of the board of directors to the corporation

The obligation of Directors, under these circumstances, is to exercise "due diligence" and not perfection. If, using due diligence, the history of Smith had been uncoverable, and was not, then the Directors who voted for Smith could be held liable. The fact that your vote was not properly registered in the minutes of the corporation, is not conclusive. You would have every right to contest that mischaracterization of your vote.

Re: Personal liability of the board of directors to the corporation

The incident you describe is covered by a body of law known as the 'Business Judgment Rule.' Despite the simple name, the so-called 'rule' is the subject of multi-volume treatises and many court decisions defining the legal duties of directors. Collectively, the duties are called the 'fiduciary duties of directors,' and they break down into the duty of care, duty of candor, duty of disclosure and duty of loyalty.

Here, the duty of care is implicated.

Based on the rather substantial loss incurred ($500,000), I would anticipate a shareholder derivative suit with fairly broad charges, probably naming all three directors, so even the relatively innocent director should be prepared to defend.

Without more facts I can't estimate the exposure of any of the possible parties to damages, but I would say the director who voted against Smith is still subject to liability; e.g. why were Board minutes not kept properly? Why wasn't there oversight in place that could prevent the embezzlement?

If I can be of further assistance, please contact me. I have some experience and research resources for matters of this nature.