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State Laws Governing Officer and Director Liability

Most state statutes governing corporations contain provisions that prescribe the situations in which an officer or director may be liable. Below is a sampling of some of these state statutes.

ALABAMA: The statute imposes a duty of good faith on directors and officers. A director or an officer may not act with intent to depreciate stocks or bonds with the further intent to buy the depreciated stocks or bonds.

ARKANSAS: The statute does not allow a corporation to limit or eliminate liability for any of the following: breach of the duty of loyalty; acts that are not carried out in good faith or that involve intentional misconduct; unlawful distributions; transactions that involve an improper personal benefit; or any breach of duty that creates third party liability.

CALIFORNIA: The director’s standard of care is to serve the corporation in good faith and in the best interests of the corporation. The director must exercise such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use in similar circumstances.

CONNECTICUT: A director may be liable for the willful nonpayment of certain taxes. A director must perform duties in good faith, with care an ordinarily prudent person in a like position would exercise in a similar circumstance, and in a manner that the director reasonably believes is in the best interests of the corporation.

DELAWARE: A director may be liable for the payment of an unlawful dividend or from an unlawful stock purchase or redemption, unless the director’s dissent or absence is noted in the corporation’s minutes. Liability for breach of fiduciary duty may be limited or eliminated in some circumstances.

FLORIDA: A director who acts in good faith, in a manner that the director reasonably believes is in the best interests of the corporation, and with the degree of diligence, care, and skill that an ordinarily prudent person would exercise under similar circumstances will not be subject to personal liability.

HAWAII: A corporation may not limit or eliminate the personal liability of a director in the following instances: the director receives an a financial benefit for which the director is not entitled; the director intentionally inflicts harm on the corporation or the shareholders; or the director intentionally violates criminal law.

ILLINOIS: A director faces penalties for improperly paying dividends or distributing assets, for failing to take reasonable steps to cause notice of dissolution to be mailed to known creditors, or for actively carrying on a business after filing articles of dissolution. A corporate director who commits an act of commercial bride or who receives a commercial bribe is liable to the corporation for three times the aggregate amount given or received in the bribe, plus attorneys’ fees.

KENTUCKY: A director is not liable for monetary damages unless the director has breached a fiduciary duty in a manner that constitutes willful misconduct or wanton or reckless disregard for the best interests of the corporation.

LOUISIANA: A director or an officer of a corporation may be liable if the corporation transacts business before capital is received or the director or officer consent to the issuance of shares in violation of the law.

MARYLAND: A corporation’s charter may expand or limit the liability of a director for money damages unless: the director received an improper benefit or profit; the director is adjudicated to have been guilty of active and deliberate dishonesty that was material to the cause of action; or the director was also a director of certain banking and/or financial institutions.

NEVADA: A director may be liable for the following: breach of fiduciary duty where breach involved intentional misconduct, fraud, or knowing violation of the law; wrongful declaration of distributions; or debts or liabilities where the director acts as the alter ego of the corporation.

NEW YORK: A director who votes for or concurs in the following actions may be liable to the corporation for the benefit of creditors and shareholders: improper declaration of a dividend; improper purchase or redemption of the corporation’s shares; improper distribution of assets after dissolution; or improper loans made to the director.

TENNESSEE: A director may not participate in a transaction involving a known conflict of interest without the approval of the shareholders or other directors unless the transaction was fair; make loans to officers or directors without shareholder approval; or vote for or assent to distribution in violation of the law or the corporation’s charter.

TEXAS: A director or an officer may demonstrate that he or she exercised ordinary care by relying on certain statements, opinions, reports, and other documents. An officer may be personally liable for tortious acts when the officer participates in the wrongdoing.

Inside State Laws Governing Officer and Director Liability