Welcome back,
Today we will be looking at the recent amendment to the Deleware General Corporations Law, which authorizes the addition of a provision in a corporation's certificate of incorporation removing the liability of corporate officers.
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Onwards and upwards,
Liam
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Company Officers vs Shareholders
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Background
As many of you are aware, the officers and directors of a company are liable to the shareholders to act in their best interest and promote the company's success. If an officer or director does not act properly in representing the company, they can be held liable for losses or damages caused to the company by the Shareholders. There are many examples of these types of suits; for example, currently, Elon Musk is facing numerous lawsuits from Tesla shareholders for his actions as CEO, which negatively impacted stock prices.
For those of you who have raised Venture Capital funds or intend to raise VC to grow your business, a Delaware C-Corp is the most common type of company you will need to register to raise funds in the US. Therefore this change in Delaware law is likely to impact companies across the country.
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The Law
Section 102(b)(7) of the Delaware General Corporation Law has been amended to that companies can limit the personal liability of corporate officers to pay monetary damages. This limitation cannot prevent liability in the following circumstances:
- a breach of the duty of loyalty
- acts not in good faith that involve intentional misconduct or a knowing violation of law
- receipt of an improper benefit
In short, the law protects you from being sued by shareholders if you make an honest mistake or misjudgement when running the company. It does not protect you if you steal from the company or engage in illegal activity.
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Takeaways
Once you start taking on shareholders and investments, it will be difficult for you to limit your liability as it provides some protection for those investors. For those of you in fields such as Blockchain/Cryptocurrency or other innovative technologies where the law is not yet clear, this may be a way to limit the potential liability you personally have to your shareholders if the company is ultimately unsuccessful.
Thinking about liability and worst-case scenarios is not something many founders consider at the early stages but starting a business is a bet. That bet only gets better if you protect your downside. Taking advantage of this new way to limit your liability when working in high-growth and high-risk companies is an easy way to ensure that you don't end up worse off than when you started.
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