Directors’ Personal Liability for Corporate Fault in the United States

Abstract:     
This book chapter outlines sources in U.S. law of personal liability for directors of corporations, with a focus on liability for wrongdoing by the corporation. The chapter surveys director liability: to creditors for violations of state corporation statutes (e.g., liability for defective incorporations, ultra vires corporate acts, and improper dividends, loans to directors, or dissolution); under common law veil piercing theories; under common law and statutes applying agency and director participation theories; and the “responsible corporate officer” doctrine.

The chapter provides a brief case study of potential director liability under CERCLA (the Superfund statute). The chapter briefly examines why U.S. law appears to impose less liability on directors than the laws of other countries. Relatively lower liability reflects the structure of U.S. corporate law, which gives directors greater discretion in making business decisions and delegating responsibility to officers and employees. Directors may thus be further removed from active involvement in corporate misconduct. Several sources of director liability thus create a disincentive for directors to police corporate misconduct. The chapter sketches normative, due process, and economic explanations for restrictions on director liability and less active director involvement in corporate decision-making. The chapter outlines how corporate law (e.g. the Caremark case) and securities regulation (e.g. Sarbanes Oxley) provide counterweights to the disincentives to director monitoring. The rule structure that makes director liability for corporate misconduct rarer in the United States compared to other jurisdictions may represent another implicit subsidy from tort creditors to shareholders and capital formation.

Number of Pages in PDF File: 30

Keywords: director liability, directors, veil piercing, responsible corporate officer, corporate crime, corporate misconduct, CERCLA, Superfund, Caremark, Sarbanes Oxley

JEL Classification: D23, D62, G30, K22, K23, K32, K42, L51, M10, M50

Accepted Paper Series