Middle-Market Business Owners and the Threat of Personal Liability: How to Protect Yourself When Making Difficult Decisions

Most middle-market business leaders are the lords of their castles. Eschewing multiple layers of managerial oversight, they are often actively involved in day-to-day decisions that include both the creation and the termination of contractual relationships. Unfortunately, the termination of a contract—even with good cause—can often lead to a lawsuit. Decision-makers increasingly find themselves targeted individually, even in situations where the issues at stake are corporate in nature.

There are, however, ways to protect yourself, including the qualified privilege defense.

Aligning Your Decisions with the Company’s Best Interests

Although it would seem obvious enough, many decision-makers—particularly those in the middle market—often forget the single most important component of the qualified privilege defense: aligning your actions with the company’s best interests. Absent a business structure that requires interdepartmental checks and balances to ensure objectivity, the line between personal agendas and broader company priorities can sometimes become blurred. A strong personal conviction regarding a particular course of action can influence the decision-making process and may lead an individual business owner to make decisions that could be considered inconsistent with the company’s larger goals or interests. In these instances, the risk of personal liability is greatly increased.

Duty of Loyalty to Your Company Trumps Third-Party Relationships

Under Illinois law, officers and directors owe an undivided loyalty to the entity for which they work. The law also recognizes that these individuals must be free to act in the best interests of the company, without undue fear of personal liability. As a consequence of that underlying principle, the duty owed to your own company outweighs any duty owed to third parties. That is to say, officers and directors who make a considered business decision that results in the breach of (or interference with) a company contract, will not be held personally liable for the economic consequences of their actions on behalf of the business—so long as their action is demonstrably consistent with the company’s legitimate interests.

So where do well-intended decision-makers go wrong? Ultimately, that question can only be answered in the context of a specific set of circumstances. In broad terms, however, the qualified privilege afforded by Illinois law will be forfeited in situations where decision-makers have acted without a legitimate business justification, or with malicious intent to harm a third party. Likewise, actions undertaken solely for a decision-maker’s self interest will also result in forfeiture of the qualified privilege—reemphasizing the notion that actions motivated by a personal bias or individual agenda are not afforded protection under the qualified privilege defense.

Theory vs. Practice

In theory, it is easy to distinguish between narrow personal concerns and broader company-related interests. In practice, however, a decision-maker’s motivation can fall prey to second guessing and misinterpretation. Some third parties, for example, might feel that they have suffered economic loss at the hands of proactive decision-makers who are aggressively advancing the best interests of their company.