Protecting Corporate Officers and Directors in North Carolina

While corporations offer significant protection to shareholders, corporate officers and directors can still face personal liability through lawsuits brought by shareholders or third parties. These individuals may be held accountable for their business decisions and could bear the financial burden of defending against legal claims. Ensuring proper protection is crucial for officers, directors, and even employees.

Acts That Give Rise to Personal Liability

Regardless of their position—whether officer, director, or employee—individuals in a corporation can be personally liable for their negligent or intentional acts. For example, if an employee causes injury while driving a company vehicle on business, that employee could be held personally responsible in addition to the corporation’s liability.

Corporate officers and directors may also face lawsuits from shareholders who claim they made poor decisions on behalf of the corporation. In North Carolina, the Business Judgment Rule offers protection to corporate officials from these types of lawsuits. Under this rule, officers and directors will not be held liable if they acted in good faith, with the care expected of a reasonably prudent person in a similar position, and in a manner they believe to be in the best interest of the corporation.

Although the Business Judgment Rule can provide a defense, the cost of litigation can still be burdensome. To mitigate these risks, corporations can take two primary protective measures: purchasing liability insurance and indemnifying their officers, directors, and employees against expenses and losses incurred in litigation.

Liability Insurance for Officers, Directors, and Employees

Corporations can obtain liability insurance policies that cover corporate directors, officers, and employees. These policies provide funds for legal defense costs and may also cover any judgments rendered against the insured parties. The premiums for such policies are paid by the company, ensuring that corporate officials do not bear the financial burden of defending lawsuits. At Ferikes Bleynat & Cannon, our business lawyers assist in evaluating insurance policies to ensure that no important coverage provisions are overlooked.

Indemnification of Corporate Officials

The North Carolina Business Corporation Act allows corporations to indemnify, or compensate, officers, directors, employees, and agents in certain situations, and in some cases, indemnification is required. North Carolina corporations can indemnify individuals who are parties to lawsuits because of their role in the corporation if the following conditions are met:

1. The individual acted in good faith.
2. The individual reasonably believed their conduct was in the corporation’s best interest.
3. In criminal proceedings, the individual had no reasonable cause to believe their conduct was unlawful.

Corporations are required to indemnify an officer or director who successfully defends a lawsuit related to their role in the company. Additionally, unless a corporation’s articles of incorporation provide otherwise, officers and directors can apply to the court for indemnification. A court may order indemnification if it determines that the officer or director is entitled to it under N.C.G.S. § 55-8-52 or if the court deems it fair and reasonable given the circumstances.

Even when officers or directors face lawsuits brought by their own corporation, indemnification may still be possible. However, these cases can be complex, and seeking sound legal counsel is critical to making informed decisions.

Contact Ferikes Bleynat & Cannon

Protecting corporate officers, directors, and employees from personal liability is a critical part of managing any business. If you are an officer or director concerned about personal liability or if your corporation needs assistance developing protection strategies, contact the business lawyers at Ferikes Bleynat & Cannon today. Our experienced attorneys can help you navigate the complexities of liability insurance, indemnification, and corporate governance.