The Study Of Director's Personal Liability

Under modern corporate covernance structure, the Board of Directors ("BOD") plays a dominant role. Therefore, with the shareholders moving away from the daily operation of the company, BOD actally has the control on the company. In one side, as the organ of the company, BOD's act is deemed as the act of company, so the legal results of the director activities will be borne by the company, in the other side, the formation of BOD's act must rely on the behavior of each individual director. Therefore, to build reasonable corporate governance structure, we must pay attention to avoid the abuses, and when the directors cause damages to the company or third parties due to their fault, such directors shall be held liable for the damages.This article focuses on the issues of company law with respect to personal liability of directors. Through normative analysis, comparasion among different company laws, and other methodologies, and based on the general theory of indemnification for damages in civil law, this article is trying to sort out and clarify the theoretical issues of directors' personal liabilities, with consideration of both practical flexibility and systematic way of thinking. This article comprises the following five chapters:Chapter I introduces the general theory of indemnification of damages in civil law. And based on this general theory, Chaper I provide the introduction of director, which is the indemnifying party. The chapter includes following issue: the definition of director, the rule to decide whether director shall be liable for damages, and the rule to calculate compensation amount."Director", as defined in this article, shall include not only the formal director, but also the "de facto director" and "shadow director", because although "de facto director" and "shadow director" are not formal director, they actually exercise the powers of directors, or control the activities of formal directors. Regarding the relationship between director and company, Common law define it as trust, under which directors have fiduciary duties to the company, while in continental law system, it is deemed as assignment, whereby the directors shall heve a duty of care. Comparing the two theories, this article holds that the relationship between directors and the company should be a "special trust". Although the relationship between directors and the company is much similar to assignment in civil law, there are significant differences between these two difinitions, that is, directors are part of the company, so the relation between the two are more closer than trustee and trustor.The relationship between directors and the company are the basis of director's liabilities. First, as the trustee of company, directors shall undertake fiduciary duties, which are divided into two groups: "duty of care" and "duty of loyalty". Director shall be liable to the company when he breaches such duty of care or duty of loyalty. Secondly, as the organ of the company, directors acts are deemed as company's act, when this company act cause damages to the third party, and there is a fault with director's act, then the director shall be liable directly to such third party.From the analysis on the legal status and responsibilities of director, this article concludes that director shall be liable to the company or the third party only when he has fault. Director is responsible for the operation of company, with the purpose of making money for shareholders, so there is no need to give special restriction on director activities. In addition, the moderate spirit of adventure, will also benefits the company. Based on the foregoing, the author believes that the directors shall not be held liable, so long as he perform his responsibilities in good faith and there is no fault in director's behavior.Furthermore, the rule to decide the scope of directors' liabilities shall include: full compensation rule, fault-offset and gains-offset rules.The second chapter of this article discusses the liability caused by director's breach of duty of care. As the duty of care is usually linked with the fault of directors, so the content of duty of care shall be considered when the court decides whether director take the liabilities. Under Continental Law system, the standard of director's duty of care is a kind of objective criteria. While in the Anglo-American legal systems, the standard changes in different periods, but according to the current company law and cases, most of them adopt a compromised standard which combined both object standard and subjective standard. First, the director shall act in good faith and with the case an ordinarily prudent person in a like position would exercise under similar circumstances. And secondly, if the atual knowledge and skill of director is higher than the ordinarily person, then this high standard shall apply. In determining whether a director is in breach of the duty of care, US court developed an important rule called "Business Judgment Rule". This rule protects the directors from personal liabilities caused by their normal conduct of operations. Its legitimacy stems from the fact that the responsibilities of directors include leading companies to engage in activities with risk of certain degree, therefore, the damages arising from such business risk shall not be allocated to the directors. But one thing to be claritfied is that "Business Judgment Rule" protects director's conduct in good faith, so bad faith or the breach of duty of loyalty shall not be covered by this ruleThe third chapter relates to the liability from breach of duty of loyalty. Director's duty of loyalty derives from the particular relationship between directors and the companies, this duty focus mainly on the ethical conduct of directors. Duty of loyalty requires that the director should be loyal to the interests of the company, and shall not take advantages of his power to pursue its own interest. The key of duty of loyalty is to avoid conflict interest. So the main type of duty of loyalth include: self-dealing restriction, usurpation of company's opportunity, and competition with company. One thing to clarify is that duty of loyalty concerns about the ethical conduct of directors, so damages caused by the breach of this duty shall not be exempted by the company or indemfied by insurance.The fourth chapter argues the liability of directors to a third party. Traditional corporate law theory holds that the directors of the company shall not be liable directly to third party. Because, on the one hand, directors can not skip the company and set up contractual relations with third parties, and on the other hand, even if the act of the directors infringe third party's right, becase director authorized act is deemed as company's act, this infringement therefore is defined as company's tort. Because of the independence of corporate personality, third party's right to claim against director is denied. However, the director actually control the acts of company, if he put company in a puppet status, infringe third party's right, but eventually escape from punishment of the law, it is unfair to the third party. Therefore, it is necessary to make director liable for his faulty act which cause third parties' damages.Chapter V discusses the weakening of director's personal liabilities. The "weakening of the director's liabilities" means, with the implementation of these regulations, the liabilities of director are reduced or eliminated. The rule of the weakening of the director's liabilities include: the legal recognition of the company's relief of director's liability, compensation of director's expenses by company, and insurance of director's liabilities. Among these three measures, insurance, strictly speaking, is not a topic of company law, but it is an important way to relieve director's liability, the other two measures reflect the spirit of company self-government.It should be noted that, from the cases of other legislation or jurisprudence, the application of the rule weakening of director's liability shall be restricted in several aspects. First, as directors actually control the company's act, so the exemption of director's liability by the company shall following particular procedure; secondly, company is permitted to compensate director of his expenses, but this right shall also be restricted. If claim is initiated by the company against director due to breach of duty of loyalty, then director shall not be eligiable for compensation, for it will lead to an embarrassing situation that company helps director to fight against itself.