Directors’ Liability in the 美国

The first source of civil liability for directors is State corporate law. The law of the state of incorporation applies, in accordance with the “internal affairs” doctrine.

Assuming a company is incorporated in New York, the New York Business Corporation Law (BSC) is the governing statute. It disciplines directors at Art. 7:

• BSC § 717 states the directors’ duty of loyalty and duty of care (“(a) A director shall perform his duties as a director, including his duties as a member of any committee of the board upon which he may serve, in good faith and with that degree of care which an ordinarily prudent person in a like position would use under similar circumstances” (Business Corporation Law § 717(a) (Consol., Lexis Advance through 2022 released Chapters 1-12)).
• Directors are allowed to rely upon “opinions, reports or statements” by officers or other employees of the company, experts or committees that the directors believe to be reliable and competent.
• The Business Judgement Rule presumption applies: according to case law, courts do not inquire into directors’ good-faith determinations regarding the corporation best interests, unless the director acted in absence of a “legitimate and lawful business purpose” or he/she wasted the company assets (M&M Country Store, Inc. v Kelly, 159 AD3d 1102 [3d Dept 2018]; See also Auerbach v Bennett, 47 NY2d 619 [1979] and Matter of Kenneth Cole Prods., Inc., Shareholder Litig., 27 NY3d 268 [2016]). A director who breached his/her fiduciary duties is liable for all damages “naturally flowing from their wrongdoing or misconduct, even though the precise result could not have been foreseen” (Id.).
• Because of the duty of loyalty, a director may be liable if a personal interest conflicting with the “best interest of the company” impairs the director’s ability to be objective.
• Directors are not individually liable for participation in a breach of contract, while they are liable to third parties for participation in a corporation’s tort or if they “directed, controlled, approved, or ratified the decision that led to the plaintiff's injury” (Fletcher v Dakota, Inc., 99 AD3d 43 [1st Dept 2012]).
  
  
• Under BSC § 719, directors are jointly and severally liable for any injury caused to creditors or shareholders by specific corporate actions they voted for or concurred in, unless they performed their duties according to BSC § 717 (a).
  
  
• Directors’ misconduct is punished under BSC § 720, which provides for a cause of action against directors:
  “(1) […] to compel the defendant to account for his official conduct in the following cases:
  (A) The neglect of, or failure to perform, or other violation of his duties in the management and disposition of corporate assets committed to his charge.
  (B) The acquisition by himself, transfer to others, loss or waste of corporate assets due to any neglect of, or failure to perform, or other violation of his duties.
  (C) In the case of directors or officers of a benefit corporation organized under article seventeen of this chapter: (i) the failure to pursue the general public benefit purpose of a benefit corporation or any specific public benefit set forth in its certificate of incorporation; (ii) the failure by a benefit corporation to deliver or post an annual report as required by section seventeen hundred eight of article seventeen of this chapter; or (iii) the neglect of, or failure to perform, or other violation of his or her duties or standard of conduct under article seventeen of this chapter.
  (2) To set aside an unlawful conveyance, assignment or transfer of corporate assets, where the transferee knew of its unlawfulness.
  (3) To enjoin a proposed unlawful conveyance, assignment or transfer of corporate assets, where there is sufficient evidence that it will be made”.
  
  
• It is relevant to notice that, under New York Not-For-Profit Corporation Law (NPC), while a similar liability to that in BSC § 719 and § 720 is provided for in NPC § 719 and § 720, NPC § 720-a limits the directors’ liability by stating that “no person serving without compensation as a director, officer, key person or trustee of a corporation, association, organization or trust […] shall be liable to any person other than such corporation, association, organization or trust based solely on his or her conduct in the execution of such office unless the conduct of such director, officer or trustee with respect to the person asserting liability constituted gross negligence or was intended to cause the resulting harm to the person asserting such liability”.

The second source of directors’ liability is security law, which can impose both civil and criminal liability on directors for violation of state and federal provisions. For instance, federal statutes such as the Securities Act of 1933 and the Securities Exchange Act of 1934 may impose liability. Moreover, the Securities and Exchange Commission rules and regulations apply to directors’ conduct.

Moreover, Banking law § 7015 establishes a form of directors’ liability, reaffirming the duty of loyalty and duty of care and stating, in relation to trust companies, that if directors “disregard provisions of Bank Law and bylaws of company, or negligently allow them to be disregarded, and loss is thereby suffered by trust company”, they are “negligent and are liable for the loss so suffered”.

In addition, similarly to the correspondent corporate provision, according to banking law “a director of a bank may rely in good faith upon a report prepared in the ordinary course of business by an officer or committee charged with responsibility for such report”.

Civil, as well as criminal, liability may arise from violations of the Foreign Corrupt Practices Act of 1977, which prohibits corrupt payment to foreign officials and bars indemnification of directors and officers for fines.

If a company wishes to list a security on the New York Stock Exchange or the National Association of Securities Dealers Automatic Quotation System, it must abide to their regulations (NYSE Listing Manual and Nasdaq Marketplace Rules), which provide for best practices and recommendations affecting also directors’ liability.

Finally, according to BSC § 402(b), the corporation’s certificate of incorporation may modify and limit the directors’ liability, within certain specific limitations.

Business Corporation Law § 720 states, at paragraph (b), that actions against a director may be brought by “a corporation, or a receiver, trustee in bankruptcy, officer, director or judgment creditor thereof, or, under section 626 (Shareholders’ derivative action brought in the right of the corporation to procure a judgment in its favor), by a shareholder, voting trust certificate holder, or the owner of a beneficial interest in shares thereof”.

With specific regards to shareholders, they may bring three types of claims against directors: direct claims, when their interest has been personally affected, class action claims, when all shareholders have been affected by the director’s action, and derivative claims, on behalf of the corporation, pursuant to certain requisites.

State statutory law disciplines the criminal liability of an individual for corporate conduct:

• specifically, New York Penal Law § 20.25 provides that “[a] person is criminally liable for conduct constituting an offense which he performs or causes to be performed in the name of or in behalf of a corporation to the same extent as if such conduct were performed in his own name or behalf [emphasis added]”.
  Therefore, directors cannot escape criminal responsibility on the basis of the mere fact that they were acting in a corporate capacity, and the “piercing of the corporate veil” doctrine will apply (People v. Aquarian Age 2000, Inc., 85 Misc 2d 504 [Sup Ct, Queens County 1976]);
• moreover, New York Banking Law § 665 is relevant, as it states that directors of a banking corporation are “guilty of a misdemeanor, if no other punishment is prescribed therefor by law”, when “[i]n case of the fraudulent insolvency of such corporation” they “have participated in such fraud” or if they wilfully act in way “as such director which is expressly forbidden by statute, or wilfully omits to perform any duty imposed upon him as such director by statute”.

Federal law may provide for individual criminal responsibility of directors for company actions in several areas of law. For instance:

• the “Responsible Corporate Officer (RCO) doctrine”, stated in United States v. Park, allows for prosecutions of directors who, while having the power to do so, failed to prevent or correct a violation of the Food, Drug and Cosmetic Act (“FDCA”) (United States v Park, 421 US 658 [1975]);
• as anticipated above, the Foreign Corrupt Practices Act of 1977 (FCPA) may give rise to criminal liability of directors for corrupts payments to foreign officials;
• finally, under the Sarbanes-Oxley Act, directors can be criminally liable “for fraudulently influencing, coercing or misleading an accounting firm during an audit, with the intention of rendering the audit report misleading” (Stephen Giove, Shearman & Sterling LLP- “Corporate Governance and Directors’ Duties 2010, Country Q&A United States”, PLC Cross-border Handbooks).
  

As per all criminal proceedings in the New York State, the NY Criminal Procedure Law (CPL) disciplines the commencements of actions. In particular:

• CPL § 100.05 provides that a “criminal action is commenced by the filing of an accusatory instrument with a criminal court”, with the distinction that actions in superior courts may only be initiated by the filing of an indictment by a grand jury, while, in local criminal courts, actions begin with the filing of a “local criminal court accusatory instrument”, namely information, simplified information, prosecutor’s information, misdemeanor complaint or felony complaint;
• in CPL § 100.15, it is specified that information, misdemeanor complaints and felony complaints, among other requisites, “must be subscribed and verified by a person known as the ‘complainant” [emphasis added]”, meaning “any person having knowledge, whether personal or upon information and belief, of the commission of the offense or offenses charged”;
• CPL § 100.35, finally, regulates prosecutor’s information.
  

In relation to civil cases, different Statutes of Limitations apply depending on whether the claim is direct or derivatives in nature:

• direct claims against directors’ misconduct are actions “to recover upon a liability imposed by statute”, subject to a three-year statute of limitations, as provided by N.Y. C.P.L.R. § 214(2), running from “the date that the plaintiff became a judgment creditor” (JSC Foreign Economic Assn. Technostroyexport v Intl. Dev. & Trade Servs., 295 F Supp 2d 366 [SDNY 2003], citing CPLR § 214 (Consol., Lexis Advance through 2022 released Chapters 1-12);
• derivative claims, instead, are actions “by or on behalf of a corporation” and, therefore, subject to the N.Y. C.P.L.R. § 213(7) six-year statute of limitations;
• according to the case law, a breach of fiduciary duty claim accrues upon discovery by the plaintiff, in case of actual fraud, and upon the breach itself, in case of constructive fraud (In re Fischer, 308 BR 631 [Bankr EDNY 2004]).

With regards to criminal cases, the “[t]imeliness of prosecutions” and the “periods of limitations” are disciplined by the New York Criminal Procedure Law, which at § 30.10 establishes the statutes of limitations applicable to specific criminal offences.

In particular:

• the graver offences, such as class A felonies and rape in the first degree, have no timing limitations as per the initiation of criminal proceedings, with the exception of specific sexual offences listed in § 30.10(2)(a-1) and (a-2), which “must be commenced within ten years after the commission thereof”;
• any other felony must be prosecuted within five years after its commission;
• criminal proceedings for misdemeanors must be initiated within two years from their commission;
• regarding petty offences, proceedings “must be commenced within one year after the commission thereof”;
• finally, the norm lists some time extensions at § 30.10(3):
• prosecutions for a “larceny committed by a person in violation of a fiduciary duty” have to be initiated within a year after the discovering of the offence or after that offence should have been discovered “in the exercise of reasonable diligence” by the aggrieved party;
• prosecutions for an “offense involving misconduct in public office by a public servant” may be commenced by “a public servant, or any other person acting in concert with such public servant at any time during such public servant’s service in such office or within five years after the termination of such service”;
• prosecutions for specific crimes listed in the environmental conservation law bear a four-year statute of limitation running from the moment the offence was discovered or should have been discovered “in the exercise of reasonable diligence”;
• prosecutions for a “misdemeanor set forth in the tax law or chapter forty-six of the administrative code of the city of New York” must be initiated within three years from their commission;
• etc..
  

Insurance for indemnification of directors is regulated under BSC § 726, which specifies that corporations may “purchase and maintain insurance” for the purpose of indemnifying the corporation “for any obligation which it incurs as a result of the indemnification of directors” and of indemnifying directors “in instances in which they may be indemnified by the corporation” or when “the contract of insurance covering such directors and officers provides, in a manner acceptable to the superintendent of financial services, for a retention amount and for co-insurance”.

Under BSC § 726(b), no insurance may cover any costs other than those of defense for directors when:

• a final adjudication established that the director’s “acts of active and deliberate dishonesty were material to the cause of action so adjudicated, or that he personally gained in fact a financial profit or other advantage to which he was not legally entitled”;
• the law of the State of New York explicitly prohibits the insurance of the risk at stake.

It is common for public companies to obtain insurance against directors’ misconduct or errors and to cover legal fees associated with civil or criminal proceedings, with the specification that insurance can never “protect directors against liability based on the director’s fraud, dishonesty or violations of criminal law”( Stephen Giove, Fabiana Sakai, Matthew Musselman and Dorman Tong, Shearman & Sterling LLP “Corporate governance and directors’ duties, An Overview”, Legal & Commercial Publishing Ltd. Subscriptions).

Finally, corporations may have “Directors’ and Officers’ liability insurance policies (D&O policies)” that provide for the specific coverages available (See Gregory A. Markel, Seyfarth Shaw LLP, “Directors and Officers Liability” in New York Business Litigation 2020, Chapter 1).

While normally all directors face the same liability, the certificate of incorporation, as mentioned above, may modify the directors’ liability within the limits of the law.

In disciplining the board of directors, BSC § 701 specifies that directors must be at least eighteen years old, and that “[t]he certificate of incorporation or the by-laws may prescribe other qualifications for directors”.

Generally speaking, executive and non-executive directors face the same liability.

At § 712, the Business Corporation Law provides for the possibility of designation, among the directors of the board, of an executive committee, “consisting of one or more directors, and each of which, to the extent provided in the resolution or in the certificate of incorporation or by-laws, shall have all the authority of the board”.
In relation to directors’ liability, the norm states that the “designation of any such committee, the delegation thereto of authority, or action by any such committee pursuant to such authority shall not alone constitute performance by any member of the board who is not a member of the committee in question, of his duty to the corporation under section 717 (Duty of directors)”, establishing a duty of supervision of directors over committees.

With regards to independence, the definition of independent directors can be found in case law: “[a] director is independent if that director is capable of making decisions for the corporation based on the merits of the subject rather than extraneous considerations or influences” (Wilson v Tully, 243 AD2d 229 [1st Dept 1998]). In other words, “independence test ultimately focuses on impartiality and objectivity”, meaning that directors cannot be independent if they act having solely the best interest of the company in mind.

In some instances, independence is a requisite for directors:

• the Sarbanes-Oxley Act (SOX), at § 301, requires all publicly-traded to have an audit committee constituted solely by independent directors;
• similarly, under federal securities laws and NYSE and Nasdaq rules, public companies must have an audit committee made exclusively of independent directors.

The U.S. Supreme Court, in United States v Bestfoods 524 US 51 [1998], held that it is a “general principle of corporate law deeply ingrained in the U.S. economic and legal systems” that a parent corporation “is not liable for the acts of its subsidiaries [emphasis added]” and that the mere existence of such a relation between two companies does not automatically entails that the parent is liable for the torts of the affiliate.

The control exercised by the parent company, including “election of directors, the making of by-laws and the doing of all other acts incident to the legal status of stockholders”, “will not create liability beyond the assets of the subsidiary”. Similarly, the fact alone that the parent company directors operate also as directors of the subsidiary is not sufficient to establish liability for the parent company.

With that in mind, a parent company will be held liable, by means of the application of the “piercing of the corporate veil” doctrine, only if and when it “actually exercised control over, or was otherwise intimately involved in the operations of, the subsidiary corporation”. A parent company will be liable for the subsidiary actions “where necessary to prevent fraud or to achieve equity”, if the parent company actually controls and is directly involved in the management of the subsidiary, “to such an extent that the subsidiary's paraphernalia of incorporation, directors and officers are completely ignored” (Townley v Emerson Elec. Co., 178 Misc 2d 740 [Sup Ct, Monroe County 1998]).