In several recent posts, I have noted that officers, unlike directors, are agents of the corporation. Recognizing the agency status of officers can affect the legal analysis in a number of significant ways, including:
Choice of law. California Corporations Code Section 2116 explicitly provides that the law of the jurisdiction of incorporation applies to the duties of directors. Conspicuously absent is any mention of officers. Under Section 291 of the Restatement (Second) Conflict of Laws, the rights and duties of a principal and agent toward each other are determined by the local law of the state which, with respect to the particular issue, has the most significant relationship to the parties and the transaction under the principles stated in Section 6 of the Restatement. In many cases, the corporation and the officer may have specified a choice of law in an employment agreement, equity award agreement or plan, severance agreement, or other employment agreement.
Statutory law. The California Civil Code includes numerous provisions governing the agency relationship. Cal. Civ. Code §§ 2295 – 2400. In most cases, an officer will also be an employee of the corporation, making the relationship subject the California Labor Code.
Duties. Section 309 of the California Corporations Code defines the standard of care applicable to directors, but not officers. The fiduciary duties of officers are sourced in the common and statutory law applicable to agents. For example, the California Labor Code requires that an agent use “ordinary care and diligence” (§ 2854), a “reasonable degree of skill” unless his or her employer has notice of the want of skill before employment (§ 2858), and “such skill as he [or she] possesses” (§ 2859).
The law of contract. The law of contract is likely to govern a corporation’s relationship with its officers to a much greater extent than with its directors. This has several important implications. Corporate employment contracts typically define the scope and nature of an officer’s obligations to the corporation in a variety of ways. For example, a contract may require only a part-time commitment, expressly permit or limit certain outside activities, or define “cause” for the purposes of termination. Does corporate law impose any limits on the parties’ freedom to contract? Could a corporation agree that an officer will be given the benefit of the business judgment rule, a question that I posed several years ago? The existence of a contractual relationship also means that both parties may be liable for breach of contract.
My point is that officers and directors do not necessarily operate under the same rules. Therefore, officers should not be unthinkingly tossed into the same legal basket as directors.