Whether you’ve been asked to sit on a corporate board or really want to boost your resume by finding a corporate board seat, there are a few key things that you’ve got to know before taking the plunge.
A board of directors is a group of people selected to help govern a corporation. A for-profit corporation is tasked with meeting the desires of its stockholders, whereas a non-profit corporation reports to its stakeholders or communities, which the non-profit serves. Whichever type of board you end up participating on, the major duties and liabilities are primarily the same.
1. Duty of care: Board members have a duty of care to act in the best interest of the stockholders and/or stakeholders of the corporation. Effectively, the board members have a fiduciary responsibility to exercise a certain level of care, skill and diligence that a reasonably prudent person in the same situation and under the same circumstances would exercise. At all times, board members must act in good faith and exercise sound business judgment as they carry out their fiduciary responsibilities, while keeping the corporation’s best interest in mind.
2. Duty of loyalty: Board members have a duty of loyalty to put the corporation’s interests ahead of their own and that duty also includes avoiding any conflicts of interest. A board member cannot usurp an opportunity for him or herself that would otherwise have been an opportunity for the corporation. He/she also cannot work on advancing a transaction that is beneficial to him or herself and offers a financial and self-dealing gain. If either scenario occurs, it doesn’t mean there’s an automatic breach of the duty. If there’s disclosure and no others are at a financial gain and the transaction is approved, this type of transaction may pass muster.
3. Duty to not commingle: Board members have a duty to avoid commingling corporate with personal assets. If board members fail to keep assets separate, they could lose the limited liability protection that the entity provides. Commingling assets makes it harder to view a corporation as a separate entity apart from its owners. Thus, it becomes much easier for a third party to assert the doctrine called “piercing the corporate veil”. Courts are likely to pierce the corporate veil and possibly assert personal liability on a board member if: (i) corporate formalities are not followed; (ii) owners commingle corporate and personal funds to satisfy obligations of the company; or (iii) the company was undercapitalized when formed, which evidences that the corporation may have been established as a shell or sham.
4. Personal Liability: Typically, board members are not liable for the debts of the company. However, if a board member personally guarantees, cosigns or pledges personal property or a home for a business loan, the liability will extend to the individual if the company fails to pay it back. Creditors might be able to take the personal property or home used as collateral to satisfy the company’s obligations.
5. Exposure to Shareholder’s Lawsuit: If not careful in observing fiduciary duties, there’s a possibility that the shareholders of the corporation might file what’s known as a derivative lawsuit against a board member or insider within the corporation who has allegedly breached his or her fiduciary duties. Procedurally, shareholders must first make a formal demand on the board of directors to cure any breach or take corrective action. If the board fails to act, the shareholders may file a lawsuit.
While it can be exciting and rewarding to sit on a board, it’s important to understand the greater implications and responsibilities of serving. For more information on the ins and outs of sitting on a board, call us at 703.319.7868 or schedule your strategy session by going to graceleelaw.com