When Can Board Members Be Held Personally Liable?

When are board members personally liable for what the company does?

A director is personally liable for a company act only when the director’s own conduct, or a statute that reaches directors, supplies the basis. Owning shares does not add exposure in the ordinary case. Under Minn. Stat. § 302A.425, a shareholder’s only obligation to the corporation or its creditors with respect to the shares is “to pay to the corporation the full consideration for which the shares are issued or to be issued.”

The paths to personal liability are these:

1. A fiduciary claim by the company or its owners. Section 302A.251, subd. 4 refers to “A director’s personal liability to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director.” The standard of conduct and the articles decide how far that exposure reaches.
2. Taking part in a wrongful act. A director or officer who personally takes part in a tort committed through the company can be liable for it.
3. Statutes that name directors. Unpaid sales and withholding taxes, unpaid unemployment insurance amounts, unlawful distributions, and securities sales each carry their own rule.
4. Veil piercing. A shareholder, including a director who owns shares, can lose the corporation’s protection by ignoring the line between personal and company affairs.

Contracts raise a separate question: whether the director signed for the company or individually, which the page on signing in the wrong capacity covers. Unpaid directors of Minnesota tax-exempt organizations have a separate statute, Minn. Stat. § 317A.257, which makes such a director “not civilly liable for an act or omission by that person if the act or omission was in good faith, was within the scope of the person’s responsibilities as a director, officer, trustee, member, agent, or fire chief of the organization, and did not constitute willful or reckless misconduct,” subject to the exceptions in subdivision 2.

How does the standard of conduct protect a director?

The standard of conduct is a director’s main protection, because a director who meets it is not liable as a director. Minn. Stat. § 302A.251, subd. 1 requires a director to act “in good faith, in a manner the director reasonably believes to be in the best interests of the corporation, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.”

Two more subdivisions shape a claim against an individual director:

1. Reliance. Under § 302A.251, subd. 2, a director “is entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data,” from three sources. They are officers or employees the director reasonably believes reliable and competent; counsel, accountants, or other professionals within their competence; and a board committee. That protection ends for “a director who has knowledge concerning the matter in question that makes the reliance otherwise permitted by paragraph (a) unwarranted.”
2. Dissent. Under § 302A.251, subd. 3, a director present when a majority approves an action “is presumed to have assented to the action approved,” unless the director objects at the start that the meeting was not lawfully called and does not participate afterward, “votes against the action at the meeting,” or is barred from voting by § 302A.255.

Courts also apply the business judgment rule. The Minnesota Supreme Court described it this way: “The business judgment rule is a presumption protecting conduct by directors that can be attributed to any rational business purpose.” Janssen v. Best & Flanagan, 662 N.W.2d 876 (Minn. 2003). The court added that “as long as the disinterested director(s) made an informed business decision, in good faith, without an abuse of discretion, he or she will not be liable for corporate losses resulting from his or her decision.” Janssen arose from a special litigation committee of a Minnesota nonprofit corporation, so it describes the rule rather than applying it to a business corporation’s board. The pages on director fiduciary duties in Minnesota and the Minnesota business judgment rule cover both in depth.

What can the articles do to limit a director’s liability?

The articles of incorporation can eliminate or limit a director’s money-damages liability to the corporation and its shareholders for breach of fiduciary duty, with five exceptions. Minn. Stat. § 302A.251, subd. 4 provides: “A director’s personal liability to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director may be eliminated or limited in the articles.”

The articles cannot eliminate or limit a director’s liability:

1. “for any breach of the director’s duty of loyalty to the corporation or its shareholders”
2. “for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law”
3. “under section 302A.559 or 80A.76,” the unlawful-distribution and securities statutes covered below
4. “for any transaction from which the director derived an improper personal benefit”
5. “for any act or omission occurring prior to the date when the provision in the articles eliminating or limiting liability becomes effective”

The clause covers only liability “to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director.” It does not address claims by anyone else, or claims of any other kind.

The clause must be in the articles: Minn. Stat. § 302A.111, subd. 4 lists it among the provisions that “may be included in the articles,” not the bylaws. After shares are issued, adding it is an articles amendment. Under Minn. Stat. § 302A.135, subd. 2, a board resolution proposing it (or a proposal by holders of three percent or more of the voting power) “shall be submitted to a vote at the next regular or special meeting of the shareholders,” and subdivision 4 says the amendment “is adopted when approved by the affirmative vote of the shareholders required by section 302A.437,” subject to the exceptions in that subdivision.

Officers get much less. Under Minn. Stat. § 302A.361, subd. 2, the articles may limit an officer’s liability “to the shareholders for monetary damages for breach, during the time the corporation is a publicly held corporation, of fiduciary duty as an officer,” and never “in any action by or in the right of the corporation.” In a closely held corporation, a director who is also the president or CEO has the subdivision 4 clause for the director role only.

When does taking part in a company’s wrongful act make a director or officer liable?

A director or officer who personally takes part in a wrong committed through the company can be personally liable for it, alongside the company. In DeRosa v. McKenzie, 936 N.W.2d 342 (Minn. 2019), the Minnesota Supreme Court applied what it called the universal rule that “an officer of a corporation who takes part in the commission of a tort by the corporation is personally liable therefor.”

The court held “that a corporate officer who did not author a defamatory statement, but participated in the publication of the statement, may be held personally liable for defamation.” The complaint alleged that the company’s CEO directed, authorized, and approved a press release about a former director, and then authorized attaching it to an SEC filing. The court also drew the limit: “A corporate officer cannot be held personally liable for a company’s defamatory acts by virtue of job title alone.”

Three conditions frame the case:

1. Posture. The court reversed a dismissal on the pleadings and reinstated the complaint. It did not decide whether the statements were defamatory, and it said whether a privilege applied “is not before us.”
2. Who. The defendant was an officer. In a closely held company, one person can be both a director and an officer, and acts taken in the officer role fall under this rule.
3. What counts. Authoring the statement was not required. Directing, authorizing, and approving it was enough to state a claim.

The court traced the universal rule to Ellingson v. World Amusement Service Ass’n, 222 N.W. 335 (Minn. 1928). It also cited Frankson v. Design Space International, 394 N.W.2d 140 (Minn. 1986). The court described Frankson as “concluding that intra-corporate preparation of a defamatory termination letter and distribution of that letter to a personnel file constituted publication sufficient for a defamation action.” The court agreed with the court of appeals that “Minnesota law does not recognize ‘reverse-vicarious liability.’” Participation liability is a different doctrine from veil piercing, covered below: it rests on what the officer did, not on how the company was run or capitalized.

Officers are held to the same standard of conduct as directors. Under Minn. Stat. § 302A.361, subd. 1, an officer must act “in good faith, in a manner the officer reasonably believes to be in the best interests of the corporation, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances,” and “A person who so performs those duties is not liable by reason of being or having been an officer of the corporation.” The elements of the underlying claim are on the page about Minnesota defamation law.

Which statutes make directors personally liable for company obligations?

Several statutes reach directors directly, among them the Minnesota trust-fund tax statute, the unemployment insurance statute, the distribution statute, and the securities civil-liability statute. None of these four depends on veil piercing, and the articles cannot limit the last two under § 302A.251, subd. 4.

Unpaid sales and withholding taxes. Minn. Stat. § 270C.56, subd. 1 makes liable “A person who, either singly or jointly with others, has the control of, supervision of, or responsibility for filing returns or reports, paying taxes, or collecting or withholding and remitting taxes and who fails to do so,” for the listed taxes, including sales tax under chapter 297A and withholding under section 290.92, plus penalties and interest. Subdivision 2 includes “an officer or director of a corporation” in the definition of person. The condition is the role, not the title: the statute turns on control, supervision, or responsibility. Under subdivision 3, the commissioner of revenue may assess the liability, and “An order assessing personal liability under this section is reviewable under section 270C.35 and is appealable to Tax Court.” Under Minn. Stat. § 270C.35, subd. 4, “the taxpayer must file a written appeal with the commissioner” within the time that subdivision sets, and once “the time for appeal has expired,” subdivision 3(c) of § 270C.56 provides that “collection action is not stayed pursuant to section 270C.33, subdivision 5, for that assessment,” so I suggest checking the current statute text as soon as an order arrives. A person who pays more than a fair share has, under subdivision 4, “a cause of action against other liable persons to recover the amount paid in excess of that person’s share of the liability.” The federal parallel, 26 U.S.C. § 6672(a), imposes a penalty equal to the unpaid tax on “Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails” to do so.

Unpaid unemployment insurance amounts. Under Minn. Stat. § 268.063, “Any officer, director, or employee of a corporation” who has or “should have had control of, supervision over, or responsibility for paying the amounts due under this chapter or section 116L.20” and who “knowingly fails to pay the amounts due, is personally liable for the amount due in the event the employer does not pay.”

Unlawful distributions. Minn. Stat. § 302A.559, subd. 1 reaches a director “who is present at a meeting and fails to vote against, or who consents in writing to,” “a distribution made in violation of section 302A.551, subdivision 1, paragraph (a), or 4,” or of a restriction in the articles, bylaws, or an agreement. If that director also “fails to comply with the standard of conduct provided in section 302A.251,” the director “is liable to the corporation, its receiver or any other person winding up its affairs,” jointly and severally with the other directors so liable. The liability runs “only to the extent that the distribution exceeded the amount that properly could have been paid under section 302A.551.” Subdivision 4 sets a time limit on these suits; I suggest reading its current text rather than relying on a summary, because the period controls whether a claim survives. A shareholder who receives the distribution, including a director who owns shares, faces a separate rule under Minn. Stat. § 302A.557, subd. 1: “A shareholder who receives a distribution made in violation of the provisions of section 302A.551 is liable to the corporation, its receiver or other person winding up its affairs, or a director under section 302A.559, subdivision 2, but only to the extent that the distribution received by the shareholder exceeded the amount that properly could have been paid under section 302A.551.” The mechanics are on the page about board approval of distributions.

Securities sales. Under Minn. Stat. § 80A.76(b), a person who sells a security in violation of § 80A.49, or “by means of an untrue statement of a material fact or an omission to state a material fact necessary in order to make the statement made, in light of the circumstances under which it is made, not misleading,” is liable to a buyer who did not know of the untruth or omission. The seller escapes only by “sustaining the burden of proof that the seller did not know and, in the exercise of reasonable care, could not have known of the untruth or omission.” Subsection (g) then makes certain persons “liable jointly and severally with and to the same extent as persons liable under subsections (b) through (f),” including “an individual who is a managing partner, executive officer, or director of a person liable under subsections (b) through (f), including an individual having a similar status or performing similar functions, unless the individual sustains the burden of proof that the individual did not know and, in the exercise of reasonable care could have known, of the existence of conduct by reason of which the liability is alleged to exist.” The published text of that clause reads “could have known,” while the parallel clauses of subsection (g) for control persons, employees, and broker-dealers, and the seller defense in subsection (b), read “could not have known.” The burden of proof sits with the director, so I suggest that the board see the offering documents before a closely held company takes money from outside investors.

Are board members liable for company debts they personally guarantee?

Yes. A personal guarantee is the director’s own promise to pay the company’s debt, so the corporation’s protection does not reach it. Section 302A.425 limits only a shareholder’s obligation “with respect to the shares,” and a guarantee is a separate contract the director signs as an individual. Minnesota’s statute of frauds, Minn. Stat. § 513.01, covers “every special promise to answer for the debt, default or doings of another,” and allows an action on it only if the agreement “is in writing, and subscribed by the party charged therewith.” A lender holding the director’s signed guarantee can sue the director on it when the company defaults, and a resulting judgment is collected from the director’s own property, as explained below.

Three terms in a guarantee deserve a careful read before signing:

1. Scope. A guarantee may cover one loan or every obligation the company owes the lender, including future ones.
2. Duration. Whether the guarantee ends when the director leaves the board depends on its own terms, so I suggest asking the lender for a written release at resignation.
3. Other collateral. Some lending documents tie several loans or pledges together, which widens what a default puts at risk.

When can board members face criminal liability?

A director faces criminal charges only under a criminal statute, for the director’s own conduct or for intentionally helping someone else commit a crime. Under Minn. Stat. § 609.05, subd. 1, “A person is criminally liable for a crime committed by another if the person intentionally aids, advises, hires, counsels, or conspires with or otherwise procures the other to commit the crime.” The word “intentionally” matters: careless oversight is a civil question under the standard of conduct, not this statute.

Tax remittance is where business owners most often meet a criminal statute. Under Minn. Stat. § 289A.63, subd. 1(b), “A person required to pay or to collect and remit a tax, who knowingly, rather than accidentally, inadvertently, or negligently, fails to do so when required, is guilty of a gross misdemeanor,” and one who “willfully attempts to evade or defeat a tax law by failing to do so when required, is guilty of a felony.” Subdivision 10 defines “person” to include “any officer or employee of a corporation or a member or employee of a partnership who as an officer, member, or employee is under a duty to perform the act in respect to which the violation occurs.” The federal statute, 26 U.S.C. § 7202, makes it a felony when “Any person required under this title to collect, account for, and pay over any tax imposed by this title . . . willfully fails to collect or truthfully account for and pay over such tax.”

Indemnification follows the same line. In a criminal proceeding, the mandatory indemnification in § 302A.521, subd. 2 applies only if the person also “had no reasonable cause to believe the conduct was unlawful.” This page covers the corporate rules that create personal exposure; it does not survey criminal statutes outside the tax examples above.

Can a director be personally liable for whistleblower retaliation?

Under the Minnesota Whistleblower Act, the company is the party that can be sued for retaliation, and a published Minnesota decision holds that an individual supervisor is not. The Act’s core rule is in Minn. Stat. § 181.932, subd. 1: “An employer shall not discharge, discipline, penalize, interfere with, threaten, restrain, coerce, or otherwise retaliate or discriminate against an employee” for protected conduct. Protected conduct includes when “the employee, or a person acting on behalf of an employee, in good faith, reports a violation, suspected violation, or planned violation of any federal or state law or common law or rule adopted pursuant to law to an employer or to any governmental body or law enforcement official,” and refusing an order the employee has “an objective basis in fact to believe violates any state or federal law or rule or regulation adopted pursuant to law,” as long as “the employee informs the employer that the order is being refused for that reason.”

The Act gives the employee these protections and remedies:

1. Identity. The identity of an employee who reports to a governmental body or law enforcement official under clause (1) or (4) “is private data on individuals,” under subdivision 2.
2. Limits. Under subdivision 3, the Act “does not permit an employee to make statements or disclosures knowing that they are false or that they are in reckless disregard of the truth.”
3. Lawsuit. Under Minn. Stat. § 181.935, an injured employee “may bring a civil action to recover any and all damages recoverable at law, together with costs and disbursements, including reasonable attorney’s fees.” A court may order relief “including but not limited to reinstatement, back pay, restoration of lost service credit, if appropriate, compensatory damages, and the expungement of any adverse records.”

Personal liability turns on the definition of employer. Minn. Stat. § 181.931, subd. 3 defines “employer” as “any person having one or more employees in Minnesota and includes the state and any political subdivision of the state.” In Obst v. Microtron, Inc., 588 N.W.2d 550 (Minn. App. 1999), the court of appeals reversed a judgment against a company’s vice president and general manager. It held: “Under the unambiguous language of the statute, the definition of employer in the Minnesota whistleblower act does not impose liability on individual supervisors.” The Minnesota Supreme Court affirmed, 614 N.W.2d 196 (Minn. 2000), on the separate ground that the employee had not established a violation of the statute. The holding rests on the definition of employer, not on the defendant’s title.

Three qualifications apply. For a director of a public company, the federal rule in 18 U.S.C. § 1514A(a) also applies. It provides that no covered company “or any officer, employee, contractor, subcontractor, or agent of such company” may retaliate against an employee for protected reports. Subsection (b) lets the employee seek relief for discrimination “by any person in violation of subsection (a).” Separately, the Minnesota Act protects an “employee,” defined in § 181.931, subd. 2 as “a person who performs services for hire in Minnesota for an employer,” so a director who reports wrongdoing is protected by it only if the director also works for the company for hire. Finally, for reprisal against a person who opposed discrimination or took part in a discrimination proceeding, the Minnesota Human Rights Act reaches individuals: Minn. Stat. § 363A.15 makes it an unfair discriminatory practice “for any individual who participated in the alleged discrimination as a perpetrator, employer, . . . or employee or agent thereof to intentionally engage in any reprisal against any person because that person: (1) opposed a practice forbidden under this chapter or has filed a charge, testified, assisted, or participated in any manner in an investigation, proceeding, or hearing under this chapter,” and Minn. Stat. § 363A.14 makes it one “for any person: (1) intentionally to aid, abet, incite, compel, or coerce a person to engage in any of the practices forbidden by this chapter.”

I suggest the board give employees a reporting channel that reaches someone outside the chain of command, and make sure no adverse action against a reporting employee goes forward without review. A retaliation claim against the company is still the board’s problem even when no director is named.

When can a court pierce the corporate veil to reach a director?

Veil piercing lets a court hold a shareholder personally liable for the corporation’s debts, and the Minnesota Supreme Court has applied it to a corporation’s dominant shareholder. In Victoria Elevator Co. of Minneapolis v. Meriden Grain Co., 283 N.W.2d 509 (Minn. 1979), the Minnesota Supreme Court held that fraud is not required and listed the factors courts weigh: “insufficient capitalization for purposes of corporate undertaking, failure to observe corporate formalities, nonpayment of dividends, insolvency of debtor corporation at time of transaction in question, siphoning of funds by dominant shareholder, nonfunctioning of other officers and directors, absence of corporate records, and existence of corporation as merely facade for individual dealings.”

The factors are not enough alone: “Disregard of the corporate entity requires not only that a number of these factors be present, but also that there be an element of injustice or fundamental unfairness.” In Victoria Elevator, the dominant shareholder never transferred most of the business property to the corporation, listed property the corporation did not own as a corporate asset in statements to a federal agency, and withdrew funds while the corporation was in financial trouble. The court affirmed a judgment holding him liable for the corporation’s contract debt: “Since defendant did not treat the corporation as a separate legal entity, he should not be entitled to its protection against personal liability.” The court also said: “Doing business in a corporate form in order to limit individual liability is not wrong; it is, in fact, one purpose for incorporating.”

When a closely held company I advised was winding down, I suggested that the owner record each personal advance to the company as a shareholder loan, with its date, amount, and bank entry. Undocumented transfers between an owner and the company look like the commingling a veil-piercing claim points to.

For a limited liability company, Minn. Stat. § 322C.0304, subd. 1 says the company’s liabilities “do not become the debts, obligations, or other liabilities of a member, manager, or governor solely by reason of” that role. Subdivision 3 applies the corporate veil case law to LLCs, except that under subdivision 2 a failure “to observe formalities relating exclusively to the management of its internal affairs is not a ground for imposing liability.” The page on piercing the corporate veil in Minnesota covers the doctrine in more depth.

Who can sue a director, and why does the type of claim matter?

The corporation, its shareholders, and outsiders can each sue a director, but a shareholder suing over harm to the company must sue on the company’s behalf. The Minnesota Supreme Court’s test asks who suffered the injury and who would receive the recovery: “Put more simply, when shareholders are injured only indirectly, the action is derivative; when shareholders show an injury that is not shared with the corporation, the action is direct.” In re Medtronic, Inc. Shareholder Litigation, 900 N.W.2d 401 (Minn. 2017).

The type of claim changes the procedure:

• Derivative claims. A derivative claim is subject to “the demand and pleading requirements of Minn. R. Civ. P. 23.09,” as Medtronic puts it. The recovery goes to the corporation.
• Closely held companies. In Wessin v. Archives Corp., 592 N.W.2d 460 (Minn. 1999), minority shareholders alleged that the majority shareholder wasted and misappropriated corporate assets. The court held the claims derivative and said: “We hold that despite the smaller number of shareholders in a closely held corporation, such shareholders are still subject to the derivative pleading requirements of Minn. R. Civ. P. 23.06.” The court described that rule as one that “simply requires particularity in the pleading relating to efforts the plaintiff extended to obtain the desired action from the directors or shareholders,” or the reasons the plaintiff made no such effort. The language Wessin quoted from Rule 23.06 now appears in Minn. R. Civ. P. 23.09, added effective January 1, 2006.
• Statutory relief. A shareholder can also seek equitable relief and attorney fees under Minn. Stat. § 302A.467 and, in a corporation that is not publicly held, under Minn. Stat. § 302A.751, subd. 1; the next section explains both.

Outsiders sue through the paths above: a person harmed by a tort the director took part in, the Minnesota commissioner of revenue or the IRS for trust-fund taxes, an investor under § 80A.76, or a creditor seeking to pierce the veil. The page on how derivative lawsuits work in Minnesota walks through the demand process.

Can a board member sue the board or fellow directors?

Yes, if the board member owns shares, because the remedies chapter 302A gives against directors belong to shareholders. A director who is also a shareholder sues in that capacity, through three main routes:

1. A derivative claim. When the other directors harmed the company itself, the claim belongs to the corporation, so the director brings it on the company’s behalf under the demand and pleading rules described above, and any recovery goes to the company.
2. Equitable relief under § 302A.467. When “a corporation or an officer or director of the corporation violates a provision of this chapter,” a court may, “in an action brought by a shareholder of the corporation,” grant equitable relief and award attorney fees to the shareholder.
3. Relief under § 302A.751. In an action by a shareholder, a court may grant equitable relief when “the directors or those in control of the corporation have acted in a manner unfairly prejudicial toward one or more shareholders in their capacities as shareholders or directors of a corporation that is not a publicly held corporation.” It may also act when “the directors or the persons having the authority otherwise vested in the board are deadlocked in the management of the corporate affairs and the shareholders are unable to break the deadlock.”

The words “or directors” in § 302A.751 matter to an owner who has been shut out of board decisions in a closely held company: unfair treatment of the owner as a director counts, and not only treatment as a shareholder. A shareholder denied the board’s records has another route. Under Minn. Stat. § 302A.461, subd. 4(e), “If a corporation or an officer or director of the corporation violates this section, a court in Minnesota may, in an action brought by a shareholder, beneficial owner, or a holder of a voting trust certificate of the corporation, specifically enforce this section and award expenses, including attorney fees and disbursements.”

A director who owns no shares cannot use §§ 302A.467, 302A.751, or 302A.461, because each names a shareholder (or, under § 302A.461, a beneficial owner or voting trust certificate holder) as the plaintiff. That director’s tools inside the boardroom are the director’s vote and the minutes: a recorded “no” vote rebuts the presumption of assent under § 302A.251, subd. 3. The shareholders, not the board, decide most removal fights, because under Minn. Stat. § 302A.223, subd. 3 directors “may be removed at any time, with or without cause, by the affirmative vote of the holders of a majority of the voting power of all shares entitled to vote at an election of directors,” subject to the cumulative-voting exception and to changes in the articles, bylaws, or a shareholder control agreement. A claim the director holds in another role, such as an employee’s wage claim or a contract claim, does not depend on the board seat.

How do indemnification and D&O insurance pay for a director’s defense?

A Minnesota corporation must indemnify a director who meets the statutory criteria unless its articles or bylaws prohibit or condition indemnification, and it may buy insurance that covers more than indemnification does. Under Minn. Stat. § 302A.521, subd. 2, “Subject to the provisions of subdivision 4, a corporation shall indemnify a person made or threatened to be made a party to a proceeding by reason of the former or present official capacity of the person” against judgments, penalties, fines, settlements, and reasonable expenses, including attorney fees.

The person must meet each criterion in subdivision 2:

1. Not already indemnified by another organization or benefit plan for the same amounts.
2. “acted in good faith”
3. “received no improper personal benefit and section 302A.255, if applicable, has been satisfied”
4. “in the case of a criminal proceeding, had no reasonable cause to believe the conduct was unlawful”
5. Reasonably believed the conduct was in the best interests of the corporation (or, for service at another organization at the corporation’s request, not opposed to them).

Defense costs can come before the case ends. Under subdivision 3, the person “is entitled, upon written request to the corporation, to payment or reimbursement by the corporation of reasonable expenses, including attorneys’ fees and disbursements, incurred by the person in advance of the final disposition of the proceeding.” The request needs a written affirmation of a good-faith belief that the criteria are met and “a written undertaking by the person to repay all amounts so paid or reimbursed by the corporation, if it is ultimately determined that the criteria for indemnification have not been satisfied,” and a determination that the facts known would not preclude indemnification. Under subdivision 6, that determination is made first “by the board by a majority of a quorum, if the directors who are at the time parties to the proceeding are not counted,” with a committee, special legal counsel, the shareholders, or a court as the fallbacks.

The company’s documents can change the default. Under subdivision 4, “The articles or bylaws either may prohibit indemnification or advances of expenses otherwise required by this section or may impose conditions on indemnification or advances of expenses in addition to the conditions contained in subdivisions 2 and 3,” if the limits apply equally to everyone in a class, and a new limit cannot reach acts before it was adopted. The page on indemnification clauses in corporate bylaws covers drafting.

Insurance fills the gaps. Under subdivision 7, a corporation may buy insurance for a person in an official capacity “whether or not the corporation would have been required to indemnify the person against the liability under the provisions of this section.” I suggest reading a directors and officers (D&O) policy’s exclusions and its definition of a covered claim before relying on it, because the statute authorizes the insurance but the policy decides what it covers.

How does a D&O insurance claim work?

The policy itself sets the claim process, and the four steps below are where directors and officers most often lose coverage they paid for. Poor executive protection (an indemnification clause the bylaws have narrowed, no exculpation clause in the articles, or a policy that excludes the claim) leaves the director paying for a lawyer and any judgment from personal funds.

1. Notice. I suggest reporting the claim to the insurer in the way and within the time the policy requires as soon as a demand letter, subpoena, or lawsuit arrives, because a policy usually defines “claim” and a late notice can put coverage at risk.
2. Coverage position. The insurer reviews the claim against the policy and responds in writing, often accepting it subject to a reservation of rights on exclusions such as fraud or intentional misconduct. That letter previews which parts of the case the policy may not pay for.
3. Defense counsel. Some policies require the insurer to defend and let it choose the lawyer; others reimburse defense costs the insured incurs, often subject to the insurer’s consent or approved rates. I suggest confirming which kind the policy is before hiring a lawyer, because a reimbursement policy may not pay for a lawyer or rate the insurer did not approve.
4. Settlement. Most policies bar settling without the insurer’s consent, and the policy limit is usually shared among every insured person and, under some coverage parts, the company. When several directors are named, the limit can run out before every defendant’s case ends.

The company’s advance under § 302A.521, subd. 3 and the insurer’s payment are separate sources, so I suggest requesting both in writing at the start.

What happens to a director’s personal assets and spouse after a personal judgment?

A judgment against a director personally is collected from the director’s own property, not the company’s. Minnesota’s exemption statute, Minn. Stat. § 550.37, subd. 1, describes how judgments are enforced by listing what is protected: “The property mentioned in this section is not liable to attachment, garnishment, or sale on any final process, issued from any court.” Property the exemption statutes do not protect can be reached by those processes. A home has its own protection under Minn. Stat. § 510.01, within the area and value limits chapter 510 sets. The house a debtor owns and occupies as a dwelling is “exempt from seizure or sale under legal process on account of any debt not lawfully charged thereon in writing.” The statute lists exceptions, such as debts for work or materials furnished in the construction, repair, or improvement of the homestead. The dollar limits in these statutes change over time, so I suggest reading their current text on the Revisor’s site before relying on any figure.

A director’s spouse is not liable for the director’s judgment because of the marriage alone. Minn. Stat. § 519.05(a) provides: “A spouse is not liable to a creditor for any debts of the other spouse. Notwithstanding this paragraph, in a proceeding under chapter 518 the court may apportion such debt between the spouses.” That protection does not cover a debt the spouse took on directly, such as a guarantee the spouse also signed, because that is the spouse’s own debt.

This is why indemnification and D&O insurance matter: they are what usually stands between a claim against a director and the director’s own property.

How is a director or officer served with a lawsuit in Minnesota?

A director or officer sued personally must be served as an individual. Under Minn. R. Civ. P. 4.03(a), service within the state is made “by delivering a copy to the individual personally or by leaving a copy at the individual’s usual place of abode with some person of suitable age and discretion then residing therein.” Under Rule 4.02, “the sheriff or any other person not less than 18 years of age and not a party to the action, may make service.” When the company is also a defendant, Rule 4.03(c) provides for serving the corporation “by delivering a copy to an officer or managing agent, or to any other agent authorized expressly or impliedly or designated by statute to receive service of summons,” such as its registered agent. Papers handed to an officer in that role serve the company, so a plaintiff suing both the officer and the company should serve each defendant under the clause that fits it.

The mail option in Minnesota is a request to waive service, not service itself. Under Rule 4.05(a), a plaintiff may send a written request with the complaint, two copies of Form 22B, and a prepaid return, “by first-class mail or other reliable means,” giving the defendant 30 days to return the waiver. Under Rule 4.05(b), if a defendant in the United States fails “without good cause” to return a waiver “requested by a plaintiff located within the United States,” the court “must impose on the defendant” the expenses later incurred in making service and the reasonable expenses, including attorney fees, of any motion to collect them. A defendant who timely returns a signed waiver “need not serve an answer to the complaint until 60 days after the request was sent.” Signing the waiver gives up formal service only: under Rule 4.05(e), “Waiving service of a summons does not waive any objection to personal jurisdiction or to venue.”

What is the board’s role in risk management and compliance?

The board oversees risk because the statute puts the company’s business under its direction. Minn. Stat. § 302A.201, subd. 1 provides that “The business and affairs of a corporation shall be managed by or under the direction of a board,” and the § 302A.251 standard of care governs how each director does that work. The reliance rule in § 302A.251, subd. 2 lets directors rely on reports from officers, professionals, and committees, which is how a board oversees risk without running operations.

In practice, I suggest the board do four things and record them in the minutes:

1. Set the risk appetite. Decide which financial, legal, operational, and reputational risks the company will accept and which it will insure, transfer, or avoid.
2. Get regular reports. Ask management for a standing report on the items that create personal exposure, including trust-fund taxes, unemployment insurance amounts, distributions, and any securities offering.
3. Assign the work. Give an audit or finance committee, or a named officer, responsibility for compliance policies, training, and internal reviews.
4. Follow up on red flags. Reliance ends when a director has knowledge “that makes the reliance otherwise permitted by paragraph (a) unwarranted,” so a warning sign calls for questions and a documented response.

What steps reduce a director’s personal exposure?

Several of the rules above turn on records a director can create before any claim exists. These six steps track those rules:

1. Check the articles for a § 302A.251, subd. 4 clause. I suggest adding one if it is missing, because the clause protects only acts after it takes effect and adding it takes a shareholder vote.
2. Vote no on the record when you disagree. A present director is presumed to assent under § 302A.251, subd. 3 unless the director “votes against the action at the meeting,” so I suggest making sure the minutes show the vote; see documenting a dissent.
3. Send conflict deals through the disinterested directors. Under Minn. Stat. § 302A.255, subd. 1, a deal in which a director has an interest is not void or voidable because of that interest if one of the statutory routes is met. One route is approval in good faith, after full disclosure of the material facts, by a majority “of the directors or committee members currently holding office.” On that route, “the interested director or directors shall not be counted in determining the presence of a quorum and shall not vote.” Another route is fairness: the deal was fair and reasonable to the corporation, and “the person asserting the validity of the contract or transaction sustains the burden of establishing that the contract or transaction was, fair and reasonable as to the corporation at the time it was authorized, approved, or ratified.” The page on board member conflicts of interest covers disclosure.
4. Confirm trust-fund taxes and unemployment insurance amounts are paid if you oversee finances. A director with “control of, supervision of, or responsibility for” paying the taxes falls within § 270C.56. Section 268.063 reaches one who has or “should have had control of, supervision over, or responsibility for paying” unemployment insurance amounts and “knowingly fails to pay the amounts due.” I suggest asking for regular confirmation that withheld and collected taxes and unemployment insurance amounts were paid, because that liability does not depend on the articles.
5. Keep personal and company money separate and documented. Loans, reimbursements, wages, and distributions each deserve their own record, because the Victoria Elevator factors look at how the owner actually treated the company.
6. Confirm the indemnification and insurance terms. Because the articles or bylaws may limit indemnification and advances under § 302A.521, subd. 4, I suggest reading them, and the D&O policy, before accepting a board seat.

Where Director Exposure Comes From

A Minnesota director who meets the standard of conduct in § 302A.251 is not liable just for holding the seat. Exposure comes from the director’s own conduct (a loyalty breach, bad faith, taking part in a tort), from statutes that reach directors (trust-fund taxes, unemployment insurance amounts, unlawful distributions, securities sales), and, for a director who is also a shareholder, from veil piercing. A personal guarantee adds exposure by contract, and criminal exposure needs a criminal statute and the director’s own knowing or intentional conduct. An exculpation clause, recorded dissents, disinterested approval of conflict deals, indemnification, and insurance each answer part of that exposure. More on board governance is collected under company control. I can analyze a specific board decision, or a claim that names you personally, and tell you where your exposure lies and which protections apply. If you would like that, email [email protected] with a short description of the decision or claim.