Liability for Improper Personal Expenses of Other Executives

CFO and corporate accountants must be aware that the improprieties of their superiors could lead to their own personal liabilities. This is because Courts have found that corporate officers can breach their fiduciary duties to a company if they are involved in conduct that benefited their superior officers by approving or concealing improper expense reimbursements. For example, in Hampshire Group, Limited v. Kuttner, C.A. No. 3607-VCS (Del. Ch. July 12, 2010), the litigation was initiated by accusations of self-dealing and lavish spending by the CEO.

One of the claimed improprieties arose out of the CEO’s reimbursed payment of the tuition of his assistant that the CFO and Accounting Officer concealed on the company’s books as a charitable donation to the school.

Although the claims against the CFO and Accounting Officer did not involve claims of self-dealing, and instead related to concealing the improper expenses of the CEO, the claims were asserted against them in their personal capacity. As a result of these claims, the Court was required to determine, “whether they acted in bad faith for a purpose other than advancing the best interests of the corporation” to determine if they could be held personally liable.

In order to help prevent these issues, officers should take the following steps to address the risks associated with their fiduciary responsibilities.

  1. Become familiar with their fiduciary duties, including the duty to report potential breaches of fiduciary responsibilities by other officers. Corporate officers who do not understand their duties to the company could underestimate their liability and lead the company to engage in needless risks.
  2. Review the corporation’s Director and Officer (D&O) liability insurance to understand what is covered and the exclusions from coverage.
  3. Understand the indemnification provisions in the company’s articles of incorporation and bylaws — what is covered and the exclusions from coverage. Consider asking the company for an indemnification agreement that matches what directors receive.
  4. Seek the advice of counsel on potentially applicable provisions of the Sarbanes-Oxley and Dodd-Frank Acts, including officers’ mandatory “claw-back” obligations in certain instances where the misconduct of certain officers can result in liability of other officers, even of such other officers were not involved in or had no knowledge of the misconduct. Such exposure should drive greater vigilance in overseeing corporate conduct.
  5. Be aware that legal protections of and awards available to whistleblowers render it more likely than ever that misconduct will become known outside the company.

If you would like more information or to schedule an appointment, please contact Nicoll, Davis & Spinella LLP. At Nicoll, Davis & Spinella, our team of lawyers experienced in employment, business affairs and compliance can help effectively meet your business needs, minimize your company’s risk and avoid the unnecessary liabilities many businesses unknowingly face. Please consider our Outside General CounselTM program as a solution to help effectively address your company’s compliance issues. Call us today at 201-712-1616 or contact us online to speak to an experienced business lawyer.