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The Board Made a Wrong Decision – Can (Should) it be Held Liable?

The board of directors made the decision to acquire a company for $100 million.  The negotiations and the due diligence process were difficult, but the board finally approved the acquisition and the transaction closed.  After closing, the acquirer determined that the value of the acquired company’s assets were greatly overstated and the acquiring company took a loss on its books.  The shareholders of the acquiring company have met to determine whether to file litigation against the directors.

In Illinois, courts have ruled that the “business judgment rules acts to shield directors who have been diligent and careful in performing their duties from liability for honest errors or mistakes of judgment”.  Absent “bad faith, fraud, illegality or gross overreaching, the courts are not at liberty to interfere with the exercise of business judgment by corporate directors”.  Thus, just because a board made the “wrong” business decision, does not mean that the directors are liable to the shareholders.

While the courts are reluctant to make business judgments for companies, this does not always prevent shareholders from “second guessing” decisions of the board.  Illinois law provides that a corporation may indemnify its directors and officers from any liability if such director or officer “acted in good faith and in a manner he or she believed to be in, or not opposed to, the best interests of the corporation”.  Since the law is permissive, in order for a corporation to attract quality persons to serve as an officer or director, it may wish to agree to indemnify such person in such situations.  It is important from the corporation’s perspective to draft such an agreement, in a manner that, while protecting the “well-intended” officer or director, also protects the company.  If you have any questions about directors’ and officers’ liability to the corporation, or would like to discuss your company’s legal concerns, please feel free to contact the business lawyers at Levin Ginsburg.

For more information, please contact:

Morris R. Saunders at: (312) 368-0100 or msaunders@lgattorneys.com

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