Why Directors Must Dissent from Objectionable Board Decisions
There are several options when it comes to selecting a legal structure for a small business, including sole proprietorships, partnerships, limited liability companies (LLCs), nonprofit corporations, and corporations. Corporations tend to be a popular choice because they provide the owners with protection from personal liability in most cases. In limited cases, however, directors, officers, and even shareholders can be held liable for corporate acts or debts.
Holding individuals liable for the actions of a corporation is generally known as piercing the corporate veil, and courts will do this in situations where corporate formalities aren't followed, the corporation acts in an illegal manner, or if the owners and the corporation are indistinct. If the board of directors does make an illegal or objectionable decision, there is a way for directors to protect themselves from liability, and that is to dissent from such board decision. This article describes the role of directors and also why directors should dissent from board decisions that are objectionable.
What Role Do Directors Play in a Corporation?
The typical corporate structure includes directors, officers, and shareholders. The directors of a corporation are in charge of directing the path and affairs of the business. Directors do not make day-to-day decisions, instead they appoint officers to oversee and handle the day-to-day operations of a business. The directors form a board, and together they make the big decisions for the corporation. Directors are generally protected from being personally liable for the corporation's debts and legal judgments, although there are instances when they can be held liable for corporate actions.
Reasons Directors Should Dissent Certain Decisions
When a director faces a board decision regarding an objectionable or even illegal matter, he or she cannot escape personal liability for the corporate action unless the director records his or her dissent, either at the time of the vote or within a short period thereafter. The director's pursuit of legal protection through this procedure serves multiple purposes:
- The dissenting director will not be liable for any legal problems arising from the vote;
- Other directors may rethink a questionable position or action; and
- Shareholders who examine the voting record receive notice of potential problems.
The law uses this requirement to push directors to state their misgivings, with the hope that their dissent will guide their corporations toward better business practices, avoid damaging third parties, and reduce the number of lawsuits. Directors must stay abreast of the board's activities, and should be prepared to dissent to actions that may implicate them personally.
Getting Legal Help
There are many legal requirements to properly forming a corporation, and there are corporate formalities that must be followed in order to maintain its corporate status. It's important to follow all the requirements because failure to do so could expose the owners to liability for the corporation's actions. If you have questions about the role of directors, or would like assistance forming a corporation, you may want to consult with an experienced business and commercial attorney in your area.
If you would like more information and resources related to this topic, please visit FindLaw's section on Incorporation and Legal Structures.