Legal Updates

Officers of a company are not personally liable to investor absent fraud or personal representations

March 11, 2021

Investors invested in a company by a short two-page agreement which included at its beginning a statement that it is made without representations, that the shares are offered only to those who can bear a full loss of their investment, and only to those who have the knowledge and experience to assess the investment and its risks and that the shares are speculative and at a high risk. Despite this and despite the fact that the investment agreement was with the company and not with its founder, after the company was unsuccessful the investors demanded compensation from the founder.

The Court dismissed the claim. The fact that a person is an organ or officer in a company does not give such person immunity from a tort claim and he will be found personally liable for an act or omission he committed as an organ, if acted fraudulently or negligently, but this will be recognized in exceptional cases only because personal liability undermines the company's separate legal personality, especially when it comes to creditors who have voluntarily contracted with the company. The same applies to the contractual responsibility of an officer for company activities, because the starting point is that the responsibility for the contracts lies with the company. Here, the investors contracted with the company while taking a voluntary risk, with the investment agreement explicitly stating that the shares are offered only to those who are willing to bear the loss of their investment and based on the representations in the agreement only, all with no fraud or misrepresentation on the side of the founder. Thus, the investors can not sue the founder for the loss of their investment.