Q:

Subject: C corporation question

Hi, I'm enjoying your blog.  I have a question I'm having difficulty getting the answer to.  If a C corporation is doing something illegal, it can expose officers to personal liability, but does the corporation have an obligation to inform shareholders of the illegal activity?  I don't know whether you might be familiar with this issue.  I'm guessing it might be covered by SEC rules?

Thanks for any info.

A:

Any time there is a financial element involved, there is a fiduciary responsibility to not harm or do things that would jeopardize the value of the assets entrusted by others. 

In a case such as you describe, officers of a corp have a definite legal responsibility to do everything possible to safeguard and protect the value of the shareholders' equity in the company.  Any officer who uses corp assets and resources to conduct an illegal activity, which would obviously harm the value of the shareholders' investment, would be civilly liable to those shareholders, in addition to any criminal prosecution for their acts.

Part of the fiduciary responsibility includes full disclosure of anything possibly relevant to the value of a shareholder's investment in a corp.  If pertinent information were withheld from the shareholders that would have an effect on their decision to hold or sell their investment, that would also be actionable.

The laws for specific remedies available to shareholders vary by state; so an attorney in the applicable state should be consulted as to how to proceed to recover compensatory damages.

I hope this helps.  Good luck.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/03/2007 11:51:00 AM Send this post: