Should I include a provision limiting or eliminating the liability of directors for monetary damages related to their actions (or inactions) as a director.

Should My Corporation Include a Provision Limiting Director Liability in the Articles of Incorporation?

When drafting your corporation’s articles of incorporation, one important option you have is to include a provision limiting or eliminating the liability of directors  for monetary damages related to their actions (or inactions) as a director. This is allowed under the Guam Corporation Act and can provide significant protection for your company’s leadership. But is it right for your business? Let’s explore.

What Does This Provision Do?

Including a director liability limitation provision in your articles of incorporation means that the corporation’s directors are protected from being personally liable to the company or its shareholders for money damages due to actions they take (or fail to take) while fulfilling their duties. In other words, it provides a layer of protection to directors against lawsuits seeking financial compensation for their decisions.

Advantages of Including the Provision

1. Attracting and Retaining Directors
   Protecting directors from personal liability can make your corporation more attractive to potential directors. People may be more willing to serve as a director if they know they won’t face personal financial risk for decisions made in good faith.

2. Encouraging Decision-Making
   Directors are responsible for making strategic decisions that involve risk. If they have personal liability protection, they are more likely to make bold decisions that could benefit the company without fearing personal financial loss.

3. Protecting Closely-Held Companies
   For small, closely-held corporations with a few shareholders, limiting director liability can be beneficial, especially if the directors are also the owners. It ensures that a director-owner is not exposed to unnecessary financial risk from other shareholders over decisions made while managing the company.

Limitations and Considerations

1. Not Absolute Protection
   This provision cannot protect directors from all forms of liability. It typically does not cover:

   • Acts of bad faith or intentional misconduct.
   • Breach of loyalty to the corporation.
   • Unlawful dividends or illegal acts.

2. Potential Concerns from Shareholders
   If shareholders are not also directors, they may be concerned that this provision reduces their ability to hold directors accountable. In such cases, it’s important to consider whether the limitation could lead to disputes or concerns about directors’ responsibilities.

3. Good Corporate Governance
   Even with this provision, directors must still act in the best interest of the company. It’s crucial to maintain good corporate governance practices to avoid actions that could lead to disputes or liabilities not covered by the provision.

Who Should Include This Provision?

• Small Corporations with Few Shareholders: If you have a small corporation where the directors and shareholders are closely related (e.g., family members or friends), limiting director liability can provide peace of mind and reduce personal risk while running the business.

• Corporations Seeking External Directors: If you plan to bring in directors who are not shareholders (e.g., an industry expert), including this provision can make the position more appealing by limiting their exposure to personal liability.

Who Should Not Include This Provision?

• Corporations with Diverse Shareholders: If there are multiple shareholders with varying interests who are not also directors, you may want to think carefully before limiting director liability. Shareholders may feel they have less ability to hold directors accountable, which could lead to conflict.

• High-Risk Industries: For corporations operating in industries that carry significant regulatory or financial risks, it might be better to ensure directors are fully accountable for their actions, which can provide additional layers of responsibility and protection for the company.

Conclusion

Including a provision to limit director liability can provide valuable protection for directors, encouraging confident decision-making and attracting qualified individuals. However, it’s important to weigh this benefit against the need for shareholder accountability and the specific dynamics of your corporation. If you’re unsure, consulting with legal experts can help you make the best choice for your business structure.