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Are Directors and Officers Protected from Liability When Acting for a Company?

On Behalf of | Aug 20, 2021 | Corporation & Company Law |

The law surrounding the insulation of directors and officers from liability is voluminous and fraught with important exceptions. In the United States, each State has its own corporate and company law statutes and varying levels of protecting directors and officers from liability. Importantly however, most states adopt a threshold rule similar to the state of Delaware’s rule which is intended to permit a court or tribunal to accept a directors or officers “business judgment” if the evidence shows that the director or officer’s judgment at the time was reasonable in the face of the totality of the commercial and corporate circumstances facing the organization.

The Business Judgment Rule.

While each case will always turn on its specific facts, and no broad brush can paint away director and officer liability under all circumstances, the business judgment rule “is embedded in American corporate law.” In the words of Delaware Supreme Court in the seminal case of Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985) “[t]he determination of whether a business judgment is an informed one turns on whether the directors have informed themselves ‘prior to making a business decision, of all material information reasonably available to them.’” Id. at 872 (quoting Kaplan v. Centex Corp., 284 A.2d 119, 124 (Del. Ch. 1971)).

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