Your business will be subject to a civil lawsuit. A whistleblower has filed a complaint with the U.S. Securities and Exchange Commission (SEC). The Criminal Investigations Division (IRS-CI) of the Internal Revenue Service investigates your business for tax evasion. As the company`s CEO, are you exposed to a personal liability risk? Finally, CEOs can be held personally liable in disputes related to corporate and shareholder derivatives. These types of cases are usually allegations of fraud against the company or mismanagement of the company`s assets or operations. In litigation involving corporate and shareholder derivatives, CEOs may be exposed to significant liability risk; And as we discuss below, claimants will often try to structure their claims in such a way that THE CEO`s D&O insurance policies don`t apply. The misuse of company funds for personal purposes is clearly illegal. It is illegal to use company funds as a personal piggy bank. From a legal point of view, it is a violation of the duty of loyalty to abuse funds, especially for one`s own benefit.

The court was cautious in considering the second proposal as a narrow and limited means of compensating shareholders for impairment losses of shares that otherwise cannot be recovered by the company. So what if a shareholder is personally harmed by a loss in the value of the company`s stock? Does the shareholder have a personal cause of action? According to a rigorous analysis by Foss v. Harbottle, the answer is no. For example, this has happened several times recently as part of the Federal Paycheque Protection Program `PPP) investigation into credit fraud. In these surveys, companies face penalties if they fraudulently obtain (or even apply for) PPP loans during the pandemic. But in many cases, their CEOs also face personal responsibility. Typically, this liability is the result of either (i) the CEO filing a fraudulent PPP loan on behalf of the company, or (ii) he or she is simply the head of an organization that fraudulently requested and/or received federal funds from a financial institution. For example, suppose a CEO offers bribes to a foreign official – a federal offence under the Foreign Corrupt Practices Act (FCPA). Even if the CEO claims to have paid the bribe on behalf of his company, the CEO can still be prosecuted for his criminal act. The same goes for cases where CEOs facilitate illegal transactions between private parties and use their positions of corporate authority to support or participate in other illegal activities. The policy that follows the rule in Foss v. Harbottle is as follows: (i) The Company is responsible as an independent legal entity for the shares of the Company, and not its shareholders.

Therefore, it is the corporation, not its shareholders, that has the right to sue for the harm done to it; and (ii) without the rule, a shareholder would still be able to sue for harm to the corporation that indirectly harms the shareholder. Corporations, limited liability companies (LLCs) and certain other types of business units isolate owners and officers from personal financial responsibility for corporate debt. Owners and officers enjoy “limited liability” based on the existence of the business entity, which is itself classified as a “person” for most legal purposes. When the business is sued, the limited liability protection afforded to its owners and managers means they are not likely to choose in their personal characteristics – in most cases. Enforcement actions taken by the government to target CEOs can have various triggers. Audits, advice, review of public submissions, and complaints from whistleblowers of disgruntled former employees or shareholders often lead to civil and criminal charges. Private civil lawsuits can also include a wide range of allegations; And with that in mind, CEOs must constantly make informed decisions that consider both their personal risk and their business risk. While CEOs should hire legal counsel for their business, in many cases they also need to hire their own personal legal counsel. This is certainly true in circumstances where the interests of the CEO and the company are at odds with each other (for example, in the case of a possible lawsuit for alleged mismanagement of the company), but CEOs may also benefit from the involvement of personal legal counsel in other circumstances.

From regulatory compliance to the creation of offshore accounts and potential conflicts of interest to transactions that could lead to federal scrutiny if not carefully structured and documented, CEOs – just like their companies – need to know how to comply with the law and effectively manage their risks. The courts will review any authorization to use the company`s funds for personal purposes. In addition to federal investigations of law enforcement agencies, this type of exposure to liability often occurs in civil litigation (where plaintiffs often bring claims against multiple related parties and individuals) and in cases of shareholder derivatives. If a plaintiff or group of shareholders believes that a CEO is directly responsible for the conduct or performance of the business, the CEO must hire his or her own defense attorney for the litigation.