Personal Liability of Directors and Officers in Tort: Searching for Coherence and Accountability

55 Pages Posted: 16 Dec 2019 Last revised: 10 Feb 2020

See all articles by Shannon O'Byrne

Shannon O'Byrne

University of Alberta - Faculty of Law

Cindy A. Schipani

University of Michigan, Stephen M. Ross School of Business

Date Written: February 2020

Abstract

The 21st century has been marred by corporate scandal after scandal, including financial fraud, pyramid schemes, international bribery, and decades of sexual harassment. This raises an important question regarding the role of corporate and tort law in controlling the behavior of corporate executives more broadly. It is clear that directors and officers should not be overexposed to tortious liability – doing so would ultimately make them insurers of the firm’s obligations. Yet underexposure creates its own set of problems, including a lack of accountability when directors and officers are not required by law to conduct themselves reasonably. The purpose of this Article is to address how U.S. state courts attribute personal liability in tort to directors and officers in actions by non-shareholder third parties. It does so, in part, by relying on Canadian law as a comparator as well as on Professor Lewis Checchia's admonishment that the law must not "reward unreasonable and unethical conduct" nor "deny recovery to injured third parties with valid legal claims." The Article concludes that, contrary to the law in certain U.S. jurisdictions, directors and officers liability should be assessed according to the ordinary principles of tort law. Defenses based on the special status of directors and officers are objectionable because they degrade corporate culture, generate moral hazard, and deny justice to the otherwise worthy plaintiff.

Keywords: corporate law, tort law, accountability, director and officer liability, corporate governance

JEL Classification: K10, K13, K22

Suggested Citation

O'Byrne, Shannon and Schipani, Cindy A., Personal Liability of Directors and Officers in Tort: Searching for Coherence and Accountability (February 2020). Forthcoming University of Pennsylvania Journal of Business Law, Vol. 22, 2020, Ross School of Business Paper No. 1395, Available at SSRN: https://ssrn.com/abstract=3493249

Shannon O'Byrne

University of Alberta - Faculty of Law ( email )

Law Centre (111 - 89 Ave)
Edmonton, Alberta T6G 2H5
Canada

Cindy A. Schipani (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI 48109
United States
(734) 763-2257 (Phone)
(734) 763-2257 (Fax)

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