Director and Officer Liability
When you set up a corporation or other limited liability company in Texas, it is likely that one key motivation is being able to insulate yourself from personal liability in your role as director or officer. The Texas Business Organizations Code allows you to protect your own assets in the event that the business is unable to pay its own debts or judgment decrees. However, there are certain situations where the limited liability nature of an entity will not protect the acts of its stakeholders. The concept is called piercing the corporate veil, and it could spell big trouble for director and officer liability situations. Not only do you face expensive litigation and put your personal assets at risk, but there are also serious consequences for your company’s reputation.
Situations Leading to Director and Officer Liability
The concept of piercing the corporate veil arose in a lawsuit, but Texas lawmakers eventually enacted a statute regarding the personal liability of directors and officers. The law will not apply personal liability unless certain circumstances are present.
- The individuals operate the company as their own alter ego, where the ties between the corporation and person are such that the two cease to be separate. Critical factors include the existence of typical corporate formalities, the degree to which assets are kept separate, and how much control the individuals maintain over the company.
- The directors or officers engaged in actual fraud by authorizing or directing activities in a meaningful way, such as by entering into fraudulent contracts or dishonest business transactions.
Preventing Personal Liability of Directors and Officers
There are some steps you can take to avoid liability in connection with your role as director or officer of a corporation. You should consult with an experienced lawyer about:
- Including provisions in your corporate bylaws that indemnify these individuals against losses that result from negligence;
- Pay closer attention to corporate governance and formalities, to avoid the implication that the company is an alter ego of the individual directors and officers; and,
- Establish a system of checks and balances that holds leadership accountable for the actions, so it is easier to pinpoint and take action against misconduct.
Talk to a Skilled Texas Attorney About Director and Officer Liability Today
The point of a corporation is to limit liability, but Texas law will not recognize the distinction between a company and stakeholders in certain situations. For more information on personal liability for directors and officers, please contact the Campbell & Associates Law Firm, P.C. in Dallas, TX. We can set up a consultation to review your case.