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Investor Lawsuits Against Corporate Officers and Directors

September 28, 2015 david.horne

Q: I have a small tech company and there are 3 shareholders, and all 3 of them are board members. What can the directors do that is going to get them in trouble?

A: It’s the officers and directors who face heightened liability relative to shareholders of the company.

One classic form of increased risk relates to the raising of money for the business. If a company takes money from an investor and the investment doesn’t do well, the company doesn’t do well, it’s possible the investor will sue the company for securities fraud, saying that some important risk or problem with the business was not fully disclosed to the investor, or that maybe even there was a misrepresentation of some important fact. The investor, if they go and get a lawyer to sue over this investment is going to be suing the company and members of the board of directors and officers of the company as all participants in what the disgruntled investor will characterize as securities fraud. So, that’s an important area.

When you have an investor or a shareholder who is in a position different than the officers and directors – someone new comes in and puts in money, whether or not they get a board seat – they can allege a material misstatement or an omission, and that liability can flow back to officers and directors personally.

Typically not to the shareholders of the company, assuming the various requirements for the proper maintenance of the corporation are met, but the officers of the corporation can be sued personally for breach of their fiduciary duties to the company and the shareholders of the company, and that would include investors in the company.

 

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