Page 67 - Washington Nonprofit Handbook 2018 Edition

CHAPTER 20. Exposure and Risks of Directors and Officers

a. Directors’ and Officers’ Liability and Exposure

A director or officer is not automatically liable simply because the
corporation is sued. Rather, liability arises because the director or officer is
charged with some breach of a duty owed either to the corporation or to a specific
party. Suits against directors or officers typically are brought in one of three ways:

y An outside party may sue a director or officer directly, claiming some
injury by the corporation.

y A party may assert some right of the corporation against a director or
officer, suing to enforce the right of the corporation. This type of suit
is referred to as a “derivative action.” In effect, the corporation is suing

the director or officer to enforce the corporation’s rights, typically
because of an alleged breach of the director’s or officer’s duty of care
or duty of loyalty to the corporation.

y A director or officer may be held independently liable under various
statutory provisions concerning issues such as employment practice
claims, environmental claims, tax delinquencies or antitrust claims.

Another source of possible liability arises in the context of corporate loans.
Washington law prohibits nonprofit corporations from making loans to directors or
officers. Any director who votes for or assents to such a loan and any officer who
participates in making such a loan will be jointly and severally liable to the
corporation for the loan amount until the loan is repaid.

b. Indemnification

Directors and officers of a nonprofit corporation typically will want the
corporation to have a program of indemnification to the maximum extent
permitted by applicable law. In Washington, a nonprofit corporation may
indemnify its officers and directors to the same extent as a for-profit.

A corporation may indemnify its directors and officers whether or not they
successfully defend against a suit, so long as the director or officer acted in good
faith and reasonably believed that actions taken on behalf of the corporation were
in the corporation’s best interests, and that any other actions (i.e., actions taken in
their individual capacities) were not opposed to the corporation’s interests.

WASHINGTON NONPROFIT HANDBOOK -56- 2018