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CALIFORNIA CORPORATE & SECURITIES LAW

A Field Guide To Distinguishing Directors From Officers

A colleague who is not a corporate lawyer recently noted that in common parlance directors and officers are often simply lumped together as the “same thing”.   He suggested that I devote a post to a primer on the differences between directors and officers.  As requested, here is my take on the subject:

Directors can not act alone while officers often do.  The General Corporation Law vests the power to exercise corporate powers “by or under the direction of the board”.  Cal. Corp. Code § 300(a).  In general, the act or decision done or made by a majority of directors present at a meeting duly held at which a quorum is present is the act of the board.  Cal. Corp. Code § 307(a)(8).  Thus, the authority of directors can only be exercised by group action while officers act alone.

Directors give direction while officers must obey directions.  The General Corporation Law vests the board with the responsibility for managing the “business and affairs of the corporation”.  Cal. Corp. Code § 300(a).  As explained by the late Professor Harold Marsh Jr. “the board is not intended to be the executive body in the corporate structure, but rather the policy-making body pursuant to whose overall supervision and control the officers actually carry on the daily operations of the corporation”.  Marsh’s California Corporation Law § 10.01.

Directors are not subordinate agents while officers are agents of the corporation.  Because directors as such have no power to act individually and are vested with ultimate authority over the business and affairs of the corporation, they are not agents of the corporation.  Cal. Civ. Code § 2295 (“An agent is one who represents another, called the principal, in dealings with third persons.”).  While the California Supreme Court has characterized directors as agents, it has recognized that they are not typical agents:

Directors are said to be agents of their corporate principal. ( Corp. Code, § 317, subd. (a).)  And “[the] true rule is, of course, that the agent is liable for his own acts, regardless of whether the principal is liable or amenable to judicial action.” ( James v. Marinship Corp. (1944) 25 Cal.2d 721, 742-743 [155 P.2d 329, 160 A.L.R. 900].)  Moreover, directors are not subordinate agents of the corporation; rather, their role is as their title suggests: they are policy-makers who direct and ultimately control corporate conduct. Unlike ordinary employees or other subordinate agents under their control, a corporate officer is under no compulsion to take action unreasonably injurious to third parties. But like any other employee, directors individually owe a duty of care, independent of the corporate entity’s own duty, to refrain from acting in a manner that creates an unreasonable risk of personal injury to third parties. The reason for this rule is that otherwise, a director could inflict injuries upon others and then escape liability behind the shield of his or her representative character, even though the corporation might be insolvent or irresponsible. (See O’Connell v. Union Drilling & Petroleum Co., supra, 121 Cal.App. 302; 18B Am.Jur.2d, supra, at p. 729, fn. 13.) Director status therefore neither immunizes a person from individual liability nor subjects him or her to vicarious liability.

Frances T. v. Village Green Owners Assn., 42 Cal. 3d 490, 723 P.2d 573, 229 Cal. Rptr. 456,  59 A.L.R.4th 447 (1986).

The General Corporation Law defines the standard of care for directors, but not officers.  Section 309(a) of the Corporations Code requires that a director perform his or her duties “in good faith, in a manner such director believes to be in the best interests of the corporation and its shareholders and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.”  In contrast, the General Corporation Law does not specify the duties of an officer.  Because officers are agents, their conduct will be established by contract (in, e.g., employment contracts and bylaws) and by general principles of agency law.

 

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