New York Court Decision Highlights the Importance of Corporate Guidance for Board Member Protection
A recent New York Appellate Division decision (Cortlandt Street Recovery Corp. v. Bonderman) underscores the significance of retaining experienced corporate counsel to protect both corporations and their board members from potential liability. The court rejected the plaintiff’s attempt to hold various related entities collectively liable for the actions of one, highlighting the complex challenges in navigating potential individual liability.
Understanding Alter Ego Liability
Attempts to “pierce the corporate veil,” or hold board members personally liable for corporate actions, require plaintiffs to prove two key elements:
- Complete Domination: The plaintiff must show that an individual or entity completely dominated the corporation’s decision-making.
- Fraud or Injustice: The plaintiff must demonstrate this domination was used to commit an act of fraud or perpetrate an injustice.
In considering domination, courts consider factors such as “the disregard of corporate formalities; inadequate capitalization; intermingling of funds; overlap in ownership; officers, directors and personnel; common office space or telephone numbers; the degree of discretion demonstrated by the alleged dominated corporation; whether the corporations are treated as independent profit centers; and the payment or guarantee of the corporation’s debts by the dominating entity” (Tap Holdings, LLC v Orix Fin. Corp., 109 AD3d 167, 174 [1st Dept 2013] [internal quotation marks omitted])
How Corporate Counsel Protects Board Members
- Proactive Guidance: Experienced corporate counsel can proactively advise board members on best practices to maintain corporate formalities, ensure adequate capitalization, and avoid actions that could blur the lines between personal and corporate interests.
- Risk Assessment: Counsel can identify potential risks and help boards implement procedures to mitigate those risks, protecting board members from personal exposure.
- Defense in Litigation: Should a lawsuit arise, corporate counsel provides a robust defense strategy, working to shield board members from individual liability.
Key Takeaways
This decision reinforces the need for board members to prioritize working with competent corporate counsel. This proactive step is crucial to protect not only the corporation but also individual board members from the potentially severe implications of alter ego liability claims and personal liability for them where their own assets are at risk.
