take_home_BLAW5330 - 1 Liability of Directors Directors...

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1. Liability of Directors Directors’ liability has been an issue of ongoing interest in corporate circles. Much has been written about its impact on the willingness of qualified persons to serve as corporate directors, but the potential economic costs of directors’ liability are also of concern. Excessive directors’ liability may cause corporate boards to spend significant amounts of time on averting liability, thereby reducing innovation and adversely affecting competitiveness. Personal liability may be viewed as a burden for directors; however, it can also be an important way to promote compliance and to allocate risk by injecting a measure of accountability into a corporation’s dealings with other parties. In dealing with the issue of the liability of directors, the book states that the ordinary rules of law relating to an agent are valid in considering the acts of a board of directors on behalf of a corporation when dealing with third persons. Individual directors making up the board are not mere employees, but part of an elected body of officers which constitute the executive agents of the corporation. The directors of a corporation have the duty of care and the duty to act in good faith, and in the best judgment of the company. The relationship of a corporate director to the corporation and its stockholders is that of fiduciary duty. A director should have some idea of what the company does so that he/she can have some idea if the company is being run properly. He/she should keep informed of activities, and if there is corporate misconduct the director should expose it. By being a director, he/she should attend board meeting regularly to find out what is going on, because if you don’t attend board meeting and the board decides on an issue that causes the company damage, he/she can be liable for the decision. In Texas, the rule is very general. The director must act in good faith and exercise ordinary care and prudence. The standard for this is the same degree of care and prudence that an ordinary person in a like position under similar circumstances would use. This is the standard rule used in determine weather a director is negligent and should be held liable. One of the cases we looked at regarding a directors liability is the case of, Francis v United Jersey Bank . The nature of this action is that a director, Mrs. Pritchard, is being
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sued by trustees in bankruptcies in a New Jersey State Court who have alleged the company that Mrs. Prichard is a director of, had obligations that she should be held personally liable for. The case states that Mrs. Pritchard was not active in the business of Pritchard & Baird. It was mainly her husband and their tow sons. However, after her husband died, the company was run primarily by their two sons. Mrs. Prichard knew virtually nothing of its corporate affairs although she became the majority owner of the company after her husbands death. She briefly visited the corporate offices, and she never read the financial statements. After her husband died, Mrs. Pritchard became
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take_home_BLAW5330 - 1 Liability of Directors Directors...

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