Common Lawsuits That Might Affect Directors

It’s a common misconception that only large, public companies will face Director & Officer lawsuits (also known as “D&O lawsuits”), but the reality is that any business or non-profit organization that has an advisory committee or a corporate board–no matter the size–can face one of these common lawsuits. 

Employees or individuals who are serving in the position of a director or corporate officer are highly susceptible to being sued for actions that are taken or performed while they are in this position, and these types of lawsuits are so common that many businesses frequently purchase D&O coverage to protect their personnel from liability in the event that they are sued. 

Direct Suit Lawsuits

This is a lawsuit often brought about by a shareholder class action either by an individual or a group of similarly-situated shareholders that are alleging personal harm. There are many reasons that a suit of this kind may be brought about, but some of the most common are, but are not limited to:

  1. Demand for payment of dividends that were promised and not received or made out.
  2. Alleged violation of a shareholder’s right to vote.
  3. Violation of the ownership rights of a shareholder or harm done to a specific shareholder.
  4. Failure to allow for a shareholder to inspect records.

Derivative Lawsuits

When shareholders find themselves concerned with the action of directors or corporate officers, they may bring about what is known as a “derivative lawsuit,” which is an action that’s brought about on the company or corporation’s behalf and typically alleges some sort of breach of fiduciary duty. 

Shareholders will usually attempt to seek to address this alleged breach before making the suit, unless there is an awareness that trying to do so would be a waste of time and effort.

Employment Law Violations

Lawsuits of this kind are very common, and will allege some form of violation or violations of workplace or employment laws like wage and hour statutes, or may even be accusations of federal and/or state discrimination statute violations. 

In particular, the start of the “#MeToo” movement has given rise to both direct and derivative lawsuits aimed against corporate officers and directors for their alleged roles in either engaging in an alleged incident or incidents of sexual misconduct, or even for covering such incidences up. 

Limits of D&O Coverage

Coverage that is purchased for protection against Director & Officer lawsuits can only go so far, and there are some things that this kind of coverage will not protect against. Primarily these are illegal acts–even if they allegedly taken on the corporation or company’s behalf–and include but are not limited to:

  1. Embezzlement.
  2. Stealing company or corporate resources.
  3. Lying to the government about corporate affairs.
  4. Lying to the public or being complicit in lying to the public.

It should be noted that such acts–or any act of illegality–will not be covered by any form of corporation or insurance and cannot prevent or protect against penalties of the civil or criminal kind. If you need further information, feel free to contact our experts at Dowd Law.