Red Flags and Director Liability

There are some words with which a corporate director wants to avoid all association. One of those phrases is ‘red flag.’ She or he never wants to hear that there are red flags that a corporate officer should be paying attention to before going forward with a particular decision or course of action.

This is exactly what was recently said about a CEO of one of the largest technology companies ever created. It is a reaction to the proposal of that company to buy Linkedin, the popular website commonly known as the business version of Facebook. The red flags involved are the price the company is proposing to pay for it and the company’s history of acquisitions.

According to reports, this tech giant is going to be paying a premium for Linkedin, as much as a 50% premium on the market price. This caused a columnist to say that doing so for this company, given their track record on acquisitions, should be considered a red flag. But no director of a corporation ever wants to have that mentioned about their work. Why?

Bad Faith and Red Flags

Under Delaware corporate law, a director can only face liability for bad faith when he or she ignores red flags. This is descriptive way of saying that when it is obvious a director should not take a course of action, so obvious in fact that there are red flags there for observation, then the director can face liability for those actions. The red flags do not have to be entirely conspicuous, however. Under these standards, the flags can be held against someone if they would have been seen by the careful observer.

While this is only the state of the law in Delaware, most state laws look to Delaware as a standard for corporate law. Many corporations have based their operations in Delaware and that has led to a sophisticated body of law regarding how corporations should be run and regulated in that state. When that is the standard as pronounced by the Delaware courts, it should give every director pause and guidance as to how to proceed.

No matter where your company is incorporated, it will be held to a high standard in its official business. Understanding and avoiding pitfalls that can cause headaches to a company is a big part of what every company does. This is on top of producing an effective product or service, and should not get in the way of a company’s success.

Avoiding Red Flags and Liability

Directors and officers of corporations have much to worry about every day. Adding liability for bad faith actions to that list is not what any director wants. So what can be done? The first step that must be taken for any director and corporation is to have the right legal counsel there to give qualified, experienced counsel on any situation that arises.

What can an experienced attorney do for your business? At Royse Law, our team of legal experts has the knowledge and understanding you need to avoid liability, take prudent steps in business, and grow your company. Contact us today so we can become part of your winning team.

Disclaimer: This blog and website are public sources of general information concerning our firm and its lawyers, as well as the information presented. They are intended, but not promised or guaranteed, to be correct, complete, and up-to-date as of the date posted. This blog and website are not intended to be, and are not, sources of legal opinion or advice. The materials, information, and communications on this blog and website do not apply to any particular person, entity, or situation, and do not apply to you or to your specific situation. You will need to consult with an attorney and/or other appropriate professional about your specific situation. Thank you.
Roger Royse

Roger Royse, the founder of the Royse Law Firm, works with companies ranging from newly formed tech startups to publicly traded multinationals in a variety of industries. Roger regularly advises on complex tax structuring, high stakes business negotiations and large international financial transactions. Practicing business and tax law since 1984, Roger’s background includes work with prominent San Francisco Bay area law firms, as well as Milbank, Tweed, Hadley and McCloy in New York City.
Read My Full Bio | Contact Me